AutoNation, Inc.110 S.E. 6th Street

Fort Lauderdale, FL 33301954-769-6000

www.autonation.com

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EXECUTION & EXCELLENCEDRIVE RESULTS

AutoNation, Inc. 2005 Annual Report

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HighlightsFINANCIAL

BUSINESS DescriptionAutoNation, Inc. (NYSE: AN) is America’s largest automotive retailer. As of April 24, 2006, we owned

and operated 345 new vehicle franchises from 268 locations in major U.S. marketsacross 17 states, predominantly in the Sunbelt region. Our stores, which we believeinclude some of the most recognizable and well-known in our key markets, sell 37 different brands of new vehicles. The core brands of vehicles that we sell, representingapproximately 96 percent of the new vehicles that we sold in 2005, are manufacturedby Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW. We offer a diversified range of automotive products and services, including new vehicles, usedvehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources.

RECENT DevelopmentOn April 12, 2006, AutoNation successfully completed a tender offer for 50 millionshares of our common stock, at a price per share of $23, together with related debt financing transactions. The transactions allowed us to deliver $1.15 billion of cash to stockholders while retaining financial flexibility to take advantage of futureopportunities. In addition, we expect the transactions to be accretive to future earnings in the estimated range of $0.13 to $0.15 per share on a full-year basis.

The $1.15 billion stock tender offer, together with a concurrent debt tender offer and consent solicitation for our 9% senior notes due 2008, was funded with the proceeds of the debt financing transactions described below together with approximately $310 million of cash on hand and revolving credit facility borrowings.Pursuant to the debt tender offer, we purchased all of the approximately $309.4 million, or 95.6%, of the Company’s outstanding 9% senior notes that were tendered.

The debt transactions included the sale of $300 million of 7% senior notes due 2014,the sale of $300 million of floating rate senior notes due 2013 at an interest rateequal to LIBOR plus 2% per year, adjusted quarterly, an amendment to our revolvingcredit agreement and a $600 million term loan maturing 2010.

As a result of the stock tender offer and related transactions, we reduced the number of our outstanding shares of common stock by 50 million, or approximately19%, and our long-term debt increased to approximately $1.5 billion.

CONSOLIDATED BALANCE SHEET HIGHLIGHTS

$20

15

10

in Billions

2004 2005

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$18.3

$19.0i

2003 2

$19.3

$

$397

$519*

$600

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400

300

200

100

0

in Millions

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2004 20052003

$396

$

2004 2005

$

20032

$1.80

1.60

1.40

1.20

1.00

.80

.60

.40

.20

0

$1.48

$1.81*

$1.46

$

$1.34 $1.36

2004 2005

A

2003

$1.80

1.60

1.40

1.20

1.00

.80

.60

.40

.20

0

$1.45 A S O F D E C E M B E R 3 1 ,

(in millions) 2003 2004 2005

Total Assets . . . . . . . . . . . . . . . . . . $ 8,823 $ 8,699 $ 8,825

Long-term Debt. . . . . . . . . . . . . . . $ 809 $ 798 $ 484

Shareholders’ Equity . . . . . . . . . . $ 3,950 $ 4,263 $ 4,670

Shares Outstanding . . . . . . . . . . . 270 264 262

*2003 results include a $127.5 million ($0.44 per share) income tax benefit from an IRS tax settlement.

**Adjusted diluted earnings per share from continuing operations excludes certain items. See the inside back coverfor a reconciliation to diluted earnings per share from continuing operations (the most comparable GAAP measure).

Total Revenue from Continuing Operations

Adjusted Diluted EarningsPer Share fromContinuing Operations**

Net Income fromContinuing Operations

Diluted Earnings Per Sharefrom Continuing Operations

InformationCORPORATE

HeadquartersAutoNation, Inc.110 S.E. 6th StreetFort Lauderdale, Florida 33301Telephone: (954) 769-6000www.AutoNation.com

Investor Contact and Information RequestsShareholders, securities analysts, portfolio managers and representatives of financial institutions requesting copies of the Annual Report, Form 10-K, quarterly reports and other corporate literature should call (954) 769-7339 or write AutoNation, Inc., Investor Relations, at the above address.

Notice of Annual MeetingThe Annual Meeting of Shareholders of AutoNation, Inc. will be held at 9:00 a.m., Thursday, June 1, 2006 at:

AutoNation Tower110 S.E. 6th StreetFort Lauderdale, FL 33301Telephone: (954) 769-6000

Common Stock InformationThe Company’s common stock trades on the New York Stock Exchange (NYSE) under the symbol “AN.”

At April 24, 2006, there were 2,650 shareholders of record.

Common Stock Transfer Agent and Registrar For inquiries regarding address changes, stock transfers, lost shares or other account matters, please contact:

Computershare Investor Services, LLC2 North LaSalle StreetChicago, IL 60602

Registered owners of AutoNation common stock may also call (800) 689-5259, Mondaythrough Friday (9:00 a.m. – 5:00 p.m., CST), to inquire about address changes, stock transfers, lost shares and other account matters.

Internet users can access information at http://www.computershare.com.

Regulatory CertificationsThe Company filed the CEO and CFO Certifications with the U.S. Securities and ExchangeCommission as required under Section 302 of the Sarbanes-Oxley Act as exhibits to itsAnnual Report on Form 10-K for the year ended December 31, 2005. On June 9, 2005, theCompany submitted the annual CEO Certification to the New York Stock Exchange (NYSE)as required under applicable rules of the NYSE.

Independent Registered Public Accounting FirmKPMG LLP, Fort Lauderdale, FL

Forward-looking StatementsSome of the statements and information contained throughout this Annual Report constitute“forward-looking statements” within the meaning of the Federal Private Securities LitigationReform Act of 1995. The forward-looking statements describe our expectations, plans andintentions about our business, financial condition, results of operations, cash flows andprospects. Known and unknown risks, uncertainties and other factors (including thosedescribed in our Form 10-K) may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed orimplied by the forward-looking statements. We undertake no duty to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.

RECONCILIATION OF GAAP REPORTED EPS FROM CONTINUING OPERATIONSTO ADJUSTED EPS FROM CONTINUING OPERATIONS

D i l u t e d E a r n i n g s p e r S h a r e

(in millions) 2003 2004 2005

EPS from continuing operations, as reported.................................................. $ 1.81 $ 1.46 $ 1.48Income tax adjustments ......................................................................................... (0.04) (0.09) (0.06)Senior note repurchases......................................................................................... - – 0.04Income tax benefit from IRS settlement – Q1 2003 ........................................ (0.44) – –Gain on sale of non-core equity investment – Q4 2003................................ (0.02) – –Impairment loss on converted megastores – Q4 2003 ................................. 0.04 – –Adjusted EPS from continuing operations ........................................................ $ 1.34 $ 1.36 $ 1.45

Note: Columns may not add due to rounding.

Edward S. Lampert 2

Chairman & Chief Executive Officer ESL Investments, Inc. (an investment firm)

Mike JacksonChairman &Chief Executive OfficerAutoNation, Inc.

Robert J. Brown 1, 2, 3, 4,5

Chairman & Chief Executive OfficerB&C Associates, Inc.(a management consulting and public relations firm)

J. P. Bryan 1

Chairman & Chief Executive OfficerTorch Energy Advisors, Inc. (an outsourcing and service provider to the oil and gas industry)

Rick L. Burdick 4

PartnerAkin, Gump, Strauss, Hauer & Feld, L.L.P.(a law firm)

Michael E. Maroone President &Chief Operating OfficerAutoNation, Inc.

Irene B. Rosenfeld 1, 2, 3

Chairman & Chief Executive OfficerFrito-Lay, Inc. (a snack and convenient food company)

William C. Crowley 4, 5

President & Chief Operating Officer ESL Investments, Inc. (an investment firm)

Board Committees1 Audit Committee 2 Compensation Committee 3 Executive Compensation

Subcommittee

4 Corporate GovernanceCommittee

5 Nominating Subcommittee

DirectorsBOARD OF

J.P. Bryan has announced that he will retire from our Board of Directors on the date of our Annual Meeting of Shareholders. J.P. has served on our Board since 1991, providingvaluable insight and guidance.

J.P.’s 15 years of service were noteworthy for theextraordinary diligence he exhibited as a directorand his unwavering commitment to building a greatcompany. J.P. took the lead as a director on manysignificant transactions and initiatives for us overthe years, and he never hesitated to challenge hisfellow directors and AutoNation management todrive towards the right decisions in furtherance of our goal of building a great company.

Please join me in thanking J.P. for his service and wishing him well in retirement and all of hisfuture endeavors.

— Mike Jackson, Chairman of the Board and CEO

TRIBUTE TO J.P. Bryan

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form10-K(Mark One)

¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-13107

AutoNation, Inc.(Exact Name of Registrant as Specified in its Charter)

DELAWARE 73-1105145(State or Other Jurisdiction of (I.R.S. EmployerIncorporation or Organization) Identification No.)

110 S.E. 6TH STREET,FORT LAUDERDALE, FLORIDA 33301

(Address of Principal Executive Offices) (Zip Code)

(954) 769-6000(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered

Common Stock, Par Value $.01 Per Share The New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes ¥ No n

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of theExchange Act. Yes n No ¥

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of ""accelerated filer and large accelerated filer'' in Rule 12b-2 of the Act).

Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes n No ¥

As of June 30, 2005, the aggregate market value of the common stock of the registrant held by non-affiliates wasapproximately $3.5 billion based on the closing price of the common stock on The New York Stock Exchange on such date.

As of February 24, 2006, the registrant had 262,522,388 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III Portions of the Registrant's Proxy Statement relating to the 2006 Annual Meeting of Stockholders.

INDEX

TO FORM 10-K

Page

PART I

Item 1. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2

Item 1A. Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11

Item 2. Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Item 3. Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16

Item 4. Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17

PART II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and IssuerPurchases of Equity SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18

Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 19

Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39

Item 8. Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40

Item 9. Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70

Item 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70

Item 9B. Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70

PART III

Item 10. Directors and Executive Officers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Item 11. Executive CompensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Item 12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

Item 14. Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

PART IV

Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71

PART I

ITEM 1. BUSINESS

Introduction

AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As ofDecember 31, 2005, we owned and operated 346 new vehicle franchises from 269 stores located in majormetropolitan markets in 17 states, predominantly in the Sunbelt region of the United States. Our stores, whichwe believe include some of the most recognizable and well-known in our key markets, sell 37 different brandsof new vehicles. The core brands of vehicles that we sell, representing more than 90% of the new vehicles thatwe sold in 2005, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda andBMW.

We operate in a single operating and reporting segment, automotive retailing. We offer a diversified rangeof automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repairservices, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products.We also arrange financing for vehicle purchases through third-party finance sources. We believe that thesignificant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies inour key markets by, among other things, reducing operating expenses, leveraging our market brands andadvertising, improving asset management and driving common processes across all of our stores.

We were incorporated in Delaware in 1991. Our common stock, par value $.01 per share, is listed on TheNew York Stock Exchange under the symbol ""AN.'' For information concerning our financial condition,results of operations and related financial data, you should review the ""Management's Discussion and Analysisof Financial Condition and Results of Operations'' and the ""Financial Statements and Supplementary Data''sections of this document. You also should review and consider the risks relating to our business, operations,financial performance and cash flows that we describe below under ""Risk Factors.''

Availability of Reports and Other Information

Our corporate website is http://corp.AutoNation.com. We make available on this website, free of charge,access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports onForm 8-K, Proxy Statements on Schedule 14A and amendments to those materials filed or furnished pursuantto Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the ""Exchange Act''), assoon as reasonably practicable after we electronically submit such material to the Securities andExchange Commission (the ""Commission''). We also make available on our website copies of materialsregarding our corporate governance policies and practices, including the AutoNation, Inc. CorporateGovernance Guidelines, our company-wide Code of Business Ethics, our Code of Ethics for Senior Officers,our Code of Business Ethics for the Board of Directors, and the charters relating to the committees of ourBoard of Directors. You also may obtain a printed copy of the foregoing materials by sending a written requestto: Investor Relations Department, AutoNation, Inc., 110 S.E. 6th Street, Fort Lauderdale, Florida 33301. Inaddition, the Commission's website is http://www.sec.gov. The Commission makes available on this website,free of charge, reports, proxy and information statements and other information regarding issuers, such as us,that file electronically with the Commission. Information on our website or the Commission's website is notpart of this document.

Business Strategy

As a specialty retailer, our business model is focused on developing and maintaining satisfied customers.The foundation of our business model is operational excellence. We continue to pursue the following strategiesto achieve our targeted level of operational excellence:

‚ Deliver a positive customer experience at our stores

‚ Leverage our significant scale to improve our operating efficiency

‚ Increase our productivity

‚ Build a powerful brand in each of our local markets

2

Our strategies are supported by our use of information technology. We use the Internet to develop andacquire customer leads and referrals. By pursuing our strategies and leveraging information technology toenhance our customer relationships, we hope to convince potential customers who live or work in our marketsthat an educated vehicle buying decision cannot be made without considering our stores.

A key component of our strategy is to maximize the return on investment generated by the use of cashflow that our business generates. We expect to use our cash flow to make capital investments in our currentbusiness, to complete strategic dealership acquisitions and to repurchase our common stock pursuant to ourBoard-authorized share repurchase program. Our capital allocation decisions will be based on such factors asthe expected rate of return on our investment, the market price of our common stock, the potential impact onour capital structure and our ability to complete strategic dealership acquisitions that meet our return oninvestment target. We also divest non-core stores from time to time in order to improve our portfolio of storesand to generate sales proceeds that can be reinvested at a higher expected rate of return.

Deliver a Positive Customer Experience

Our goal is to deliver a positive customer experience at our stores. Our efforts to improve our customers'experience at our stores include the following practices and initiatives in key areas of our business:

‚ Improving Customer Service: The success of our stores depends in significant part on our ability todeliver positive experiences to our customers. We have developed and continue to implementstandardized customer-friendly sales and service processes. We expect these processes will continue toimprove the sales and service experiences of our customers. We have developed and are implementingacross our stores a customer-friendly sales menu designed to provide clear disclosure of purchase orlease transaction terms. We emphasize the importance of customer satisfaction to our key storepersonnel by basing a portion of their compensation on the quality of customer service they provide inconnection with vehicle sales and service.

‚ Increasing Parts and Service Sales: Our goal is that our customers will use us for all of their vehicleservice needs. Our key initiatives for our parts and service business are focused on optimizing ourprocesses, pricing and promotion. We have implemented across all of our stores standardized serviceprocesses and marketing communications, which are designed to ensure that we offer our existing andpotential customers the complete range of vehicle maintenance and repair services. We expect ourservice processes and marketing communications to increase our customer-pay service and partsbusiness. As a result of our significant scale, we believe we can communicate frequently and effectivelywith our customers. Our efforts at optimizing our pricing are directed toward maintaining competitivepricing for commonly performed vehicle services and repairs for like-brand vehicles within each of ourmarkets.

‚ Increasing Finance, Insurance and Other Aftermarket Product Sales: We continue to improve ourfinance and insurance business by using our standardized processes across our store network. Ourcustomers are presented with the ""AutoNation Pledge,'' which provides clear disclosure relating to thefinance and insurance sales process. We believe the pledge improves our customers' shoppingexperience for finance and insurance products at our stores. Additionally, our stores use our customer-friendly electronic finance and insurance menu, which is designed to ensure that we offer ourcustomers the complete range of finance, insurance and other aftermarket products in a transparentmanner. We offer our customers aftermarket products such as extended warranty contracts, mainte-nance programs, theft deterrent systems and various insurance products at competitive rates and prices.We also continue to focus on optimizing the mix of finance sources available for our customers'convenience.

3

Leverage Our Significant Scale

We continue to leverage our status as the largest automotive retailer in the United States to furtherimprove our cost structure by obtaining significant cost savings in our business. The following practices andinitiatives reflect our commitment to leveraging our scale and managing cost:

‚ Managing New Vehicle Inventories: We continue to manage our new vehicle inventories to optimizeour stores' supply and mix of new vehicle inventory. Through the use of our web-based planning andtracking system, in markets where our stores have critical mass in a particular brand, we view newvehicle inventories at those same brand stores in the aggregate and coordinate vehicle ordering andinventories across those stores. We believe our web-based planning and tracking system and newvehicle purchasing strategy enable us to better manage our new vehicle inventory to achieve specificmonth-end unit inventory targets. We also target our new vehicle inventory purchasing to our core, ormost popular, model packages. We are focused on maintaining appropriate inventory levels, which webelieve is important in light of the higher carrying costs associated with the higher interest rates that weexperienced in 2005 and that we expect in 2006. We believe our inventory management enables us to(1) respond to customer requests better than smaller independent retailers with more limitedinventories and (2) maximize the availability of the most desirable products during seasonal peakperiods of customer demand for vehicles.

‚ Increasing Used Vehicle Sales and Managing Used Vehicle Inventories: Each of our stores offers avariety of used vehicles. We believe that we have access to desirable used vehicle inventory and are in aposition to realize the benefits of vehicle manufacturer-supported certified used vehicle programs,which we believe are improving consumers' attitudes toward used vehicles. We use a web-based usedvehicle inventory tool that enables our stores within each of our markets to optimize their used vehicleinventory supply, mix and pricing. We also are managing our used vehicle inventory to enable us tooffer our customers a wide selection of desirable lower-cost vehicles, which are often in high demandby consumers. Our used vehicle business strategy is focused on (1) using our customized vehicleinventory management system, which is our standardized approach to pricing, inventory mix and usedvehicle asset management based on our established common processes, and (2) leveraging our scalewith comprehensive used vehicle marketing programs, such as market-wide promotional events andstandardized approaches to advertising that we can implement more effectively than smaller retailersbecause of our size.

‚ Managing Costs: We continue to aggressively manage our business and leverage our scale to reducecosts. We continue to focus on developing national vendor relationships to standardize our stores'approach to purchasing certain equipment, supplies, and services, and to improve our cost efficiencies.As an example, we realize cost efficiencies with respect to advertising and facilities maintenance thatare generally not available to smaller retailers.

Increase Productivity

The following are examples of key initiatives we have implemented to increase productivity:

‚ Managing Employee Productivity and Compensation: We continue to develop and implement at ourstores standardized compensation guidelines and common element pay plans that take into account oursales volume and gross margin objectives, the vehicle brand and the size of the store. We continue tofocus on better aligning the compensation of our employees with the performance of our stores toimprove employee productivity, reward and retain high-performing employees and to ensure appropri-ate variability of our compensation expense.

‚ Using Information Technology: We are leveraging information technology to enhance our customerrelationships and increase productivity. We continue to use a web-based customer relationshipmanagement tool across all of our stores. We believe this tool enables us to promote and sell ourvehicles and other products more effectively by allowing us to better understand our customer trafficflows and better manage our showroom sales processes and customer relationships. We have developeda company-wide customer database that contains information on our stores' existing and potentialcustomers. We believe our customer database enables us to implement more effectively our vehicle

4

sales and service marketing programs. We expect our customer database and other tools to continue toempower us to implement our customer relationship strategy more effectively and improve ourproductivity.

‚ Training Employees: One of our key initiatives to improve our productivity is our customizedcomprehensive training program for key store employees. We believe that having well-trainedpersonnel is an essential requirement for implementing standardized operating practices and policiesacross all of our stores. Our training program educates our key store employees about their respectivejob roles and responsibilities and our standardized common processes in all of our areas of operation,including sales, finance and insurance and fixed operations. Our training program also emphasizes theimportance of conducting our operations, including our finance and insurance sales operations, inaccordance with applicable laws and regulations and our policies and ethical standards. As part of ourtraining program, we conduct specialized training for certain of our store employees in areas such asfinance and insurance, fixed operations and sales. We also require all of our employees, from our seniormanagement to our technicians, to participate in our Business Ethics Program, which includes web-based interactive training programs, live training workshops, written manuals and videos on specifictopics. We also are launching the AutoNation General Manager University in 2006 to prepare ourfuture general manager prospects to become well-rounded successful leaders of our stores. We expectour comprehensive training program to improve our productivity by ensuring that all of our employeesconsistently execute our business strategy and manage our daily operations in accordance with ourcommon processes and policies, applicable laws and regulations and our high standards of businessethics.

Build Powerful Local-Market Brands

In many of our key markets where we have significant market share, we are marketing our stores under alocal retail brand. We continue to position these local retail brands to communicate to customers the keyfeatures that we believe differentiate our stores in our branded markets from our competitors, such as the largeinventory available for customers, our extended evening and weekend service hours and the competitivepricing we offer for widely available services. We believe that by having our stores within each local marketspeak with one voice to the automobile-buying public, we can achieve marketing and advertising cost savingsand efficiencies that generally are not available to many of our local competitors. We also believe that we cancreate strong retail brand awareness in our markets.

We have fifteen local brands in our key markets, including ""Maroone'' in South Florida; ""John Elway'' inDenver, Colorado; ""AutoWay'' in Tampa, Florida; ""Bankston'' in Dallas, Texas; ""Courtesy'' in Orlando,Florida; ""Desert'' in Las Vegas, Nevada; ""Team'' in Atlanta, Georgia; ""Mike Shad'' in Jacksonville, Florida;""Dobbs'' in Memphis, Tennessee; ""Fox'' in Baltimore, Maryland; ""Mullinax'' in Cleveland, Ohio; ""Ap-pleway'' in Spokane, Washington; ""Champion'' in South Texas; ""Power'' in Southern California and Arizona;and ""AutoWest'' in Northern California. The stores we operate under local retail brands as of December 31,2005 accounted for approximately 69% of our total revenue during fiscal 2005.

Operations

Each of our stores acquires new vehicles for retail sale either directly from the applicable automotivemanufacturer or distributor or through dealer trades with other stores of the same franchise. Accordingly, wedepend in large part on the automotive manufacturers and distributors to provide us with high-quality vehiclesthat consumers desire and to supply us with such vehicles at suitable quantities and prices and at the righttimes. Our operations, particularly our sales of new vehicles, are impacted by the sales incentive programsconducted by the automotive manufacturers to spur consumer demand for their vehicles. These sales incentiveprograms are often not announced in advance and therefore can be difficult to plan for when orderinginventory. We generally acquire used vehicles from customer trade-ins, at the termination of leases and, to alesser extent, auctions and other sources. We generally recondition used vehicles acquired for retail sale at ourstores' service facilities and capitalize costs related thereto as used vehicle inventory. Used vehicles that we donot sell at our stores generally are sold at wholesale through auctions.

5

We provide a wide variety of financial products and services to our customers in a convenient manner andat competitive prices. We arrange for our customers to finance vehicles through installment loans or leaseswith third-party lenders, including the vehicle manufacturers' and distributors' captive finance subsidiaries, inexchange for a commission payable to us by the third-party lender. Commissions that we receive from thesethird-party lenders may be subject to chargeback, in full or in part, if loans that we arrange are defaulted on orprepaid or upon other specified circumstances. However, our exposure to loss in connection with arrangingthird-party financing generally is limited to the commissions that we receive. We do not directly finance ourcustomers' vehicle leases or purchases.

We also offer our customers various vehicle protection products, including extended service contracts,maintenance programs, guaranteed auto protection (known as ""GAP,'' this protection covers the shortfallbetween a customer's loan balance and insurance payoff in the event of a casualty), credit insurance, lease""wear and tear'' insurance and theft protection products at competitive prices. The vehicle protection productsthat our stores currently offer to customers are underwritten and administered by independent third parties,including the vehicle manufacturers' and distributors' captive finance subsidiaries. We primarily sell theproducts on a straight commission basis; however, we also may participate in future profit, if any, pursuant to aretrospective commission arrangement. Commissions that we receive from these third-party providers may besubject to chargebacks, in full or in part, if products that we sell, such as extended service contracts, arecancelled.

Our stores also provide a wide range of vehicle maintenance, repair, paint and collision repair services,including warranty work that can be performed only at franchised dealerships and customer-pay service work.

Sales And Marketing

We retailed approximately 627,000 new and used vehicles through our stores in 2005. We sell a broadrange of well-known vehicle makes within each of our key markets.

Our marketing efforts focus on mass marketing and targeted marketing in our local markets and aredesigned to build our business with a broad base of repeat, referral and new customers. We engage inmarketing and advertising primarily through newspapers, radio, television, direct mail and outdoor billboardsin our local markets. As we have consolidated our operations in certain of our key markets under one localretail brand name, we have been able to focus our efforts on building consumer awareness of the selected localretail brand name rather than on the individual legacy names under which our stores operated prior to theiracquisition by us. We also continue to develop newspaper, television and radio advertising campaigns that wecan modify for use in multiple local markets. We expect to continue to realize cost efficiencies with respect toadvertising expenses that are not generally available to smaller retailers, due to our ability to obtain efficienciesin developing advertising campaigns and our ability to gain volume discounts and other concessions as weincrease our presence within our key markets and operate our stores under a single retail brand name in ourlocal markets.

We also have been able to use our significant scale to market our stores and vehicle inventory via theInternet. According to industry analysts, the majority of new car buyers nationwide consult the Internet fornew car information, which is resulting in better-informed customers and a more efficient sales process. Aspart of our e-commerce marketing strategy, we are focused on (1) developing websites and an Internet salesprocess that appeal to on-line automobile shoppers; (2) obtaining high visibility on the Internet throughalliances with Internet search engines, such as Google, through our own websites, and through strategicpartnerships and alliances with other e-commerce companies, including Microsoft's MSN Autos, AmericaOnline, Edmunds, Kelley Blue Book, Yahoo! Autos and others; and (3) developing and maintaining a coststructure that permits us to operate efficiently. In addition, under the terms of our strategic alliances andpartnerships with e-commerce companies, we have access to hundreds of thousands of customer leads, whichincreases our potential for new and used vehicle sales.

Agreements with Vehicle Manufacturers

We have entered into framework agreements with most major vehicle manufacturers and distributors.These agreements, which are in addition to the franchise agreements described in the following paragraph,

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contain provisions relating to our management, operation, advertising and marketing, and acquisition andownership structure of automotive stores franchised by such manufacturers. These agreements contain certainrequirements pertaining to our operating performance (with respect to matters such as sales volume, saleseffectiveness and customer satisfaction), which, if we do not satisfy, adversely impact our ability to makefurther acquisitions of such manufacturer's stores or could result in us being compelled to take certain actions,such as divesting a significantly underperforming store, subject to applicable state franchise laws. Additionally,these agreements set limits (nationally, regionally and in local markets) on the number of stores that we mayacquire of the particular manufacturer and contain certain restrictions on our ability to name and brand ourstores. Some of these framework agreements give the manufacturer or distributor the right to acquire at fairmarket value, or the right to compel us to sell, the automotive stores franchised by that manufacturer ordistributor under specified circumstances in the event of a change in control of our company (generallyincluding certain material changes in the composition of our board of directors during a specified time period,the acquisition of 20% or more of the voting stock of our company by another vehicle manufacturer ordistributor or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated witha vehicle manufacturer or distributor) or other extraordinary corporate transactions such as a merger or sale ofall of our assets. In addition, we have granted certain manufacturers the right to acquire, at fair market value,our automotive dealerships franchised by that manufacturer in specified circumstances in the event of ourdefault under the indenture for our senior unsecured notes due 2008 or the credit agreement for our revolvingcredit facility.

We operate each of our new vehicle stores under a franchise agreement with a vehicle manufacturer ordistributor. The franchise agreements grant the franchised automotive store a non-exclusive right to sell themanufacturer or distributor's brand of vehicles and offer related parts and service within a specified marketarea. These franchise agreements grant our stores the right to use the manufacturer or distributor's trademarksin connection with their operations, and they also impose numerous operational requirements and restrictionsrelating to inventory levels, working capital levels, the sales process, marketing and branding, showroom andservice facilities and signage, personnel, changes in management and monthly financial reporting, among otherthings. The contractual terms of our stores' franchise agreements provide for various durations, ranging fromone year to no expiration date, and in certain cases manufacturers have undertaken to renew such franchisesupon expiration so long as the store is in compliance with the terms of the agreement. We generally expect ourfranchise agreements to survive for the foreseeable future and, when the agreements do not have indefiniteterms, anticipate routine renewals of the agreements without substantial cost or modification. Our stores'franchise agreements provide for termination of the agreement by the manufacturer or non-renewal for avariety of causes (including performance deficiencies in such areas as sales volume, sales effectiveness andcustomer satisfaction). However, in general, the states in which we operate have automotive dealershipfranchise laws that provide that, notwithstanding the terms of any franchise agreement, it is unlawful for amanufacturer to terminate or not renew a franchise unless ""good cause'' exists. It generally is difficult for amanufacturer to terminate, or not renew, a franchise under these laws, which were designed to protect dealers.In addition, in our experience and historically in the automotive retail industry, dealership franchiseagreements are rarely involuntarily terminated or not renewed by the manufacturer. From time to time, certainmanufacturers assert sales and customer satisfaction performance deficiencies under the terms of ourframework and franchise agreements at a limited number of our stores. We generally work with thesemanufacturers to address the asserted performance issues. For a further discussion, please refer to the riskfactor captioned ""We are subject to restrictions imposed by, and significant influence from, vehiclemanufacturers that may adversely impact our business, financial condition, results of operations, cash flowsand prospects, including our ability to acquire additional stores'' in the ""Risk Factors'' section of thisdocument.

Regulations

Automotive and Other Laws and Regulations

We operate in a highly regulated industry. A number of state and federal laws and regulations affect ourbusiness. In every state in which we operate, we must obtain various licenses in order to operate ourbusinesses, including dealer, sales and finance and insurance licenses issued by state regulatory authorities.

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Numerous laws and regulations govern our conduct of business, including those relating to our sales,operations, financing, insurance, advertising and employment practices. These laws and regulations includestate franchise laws and regulations, consumer protection laws, privacy laws, escheatment laws, anti-moneylaundering laws and other extensive laws and regulations applicable to new and used motor vehicle dealers, aswell as a variety of other laws and regulations. These laws also include federal and state wage-hour, anti-discrimination and other employment practices laws.

Our financing activities with customers are subject to federal truth-in-lending, consumer leasing andequal credit opportunity laws and regulations as well as state and local motor vehicle finance laws, leasinglaws, installment finance laws, usury laws and other installment sales and leasing laws and regulations, some ofwhich regulate finance and other fees and charges that may be imposed or received in connection with motorvehicle retail installment sales and leasing. Claims arising out of actual or alleged violations of law may beasserted against us or our stores by individuals or governmental entities and may expose us to significantdamages or other penalties, including revocation or suspension of our licenses to conduct store operations andfines.

Our operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal MotorVehicle Safety Standards promulgated by the United States Department of Transportation and the rules andregulations of various state motor vehicle regulatory agencies. The imported automobiles we purchase aresubject to United States customs duties and, in the ordinary course of our business we may, from time to time,be subject to claims for duties, penalties, liquidated damages or other charges.

Environmental, Health and Safety Laws and Regulations

Our operations involve the use, handling, storage and contracting for recycling and/or disposal ofmaterials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries,cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is subject to acomplex variety of federal, state and local requirements that regulate the environment and public health andsafety.

Most of our stores utilize aboveground storage tanks, and to a lesser extent underground storage tanks,primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment, upgradingand removal under the Resource Conservation and Recovery Act and its state law counterparts. Clean-up orother remedial action may be necessary in the event of leaks or other discharges from storage tanks or othersources. In addition, water quality protection programs under the federal Water Pollution Control Act(commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and localprograms govern certain discharges from some of our operations. Similarly, certain air emissions fromoperations such as auto body painting may be subject to the federal Clean Air Act and related state and locallaws. Certain health and safety standards promulgated by the Occupational Safety and Health Administrationof the United States Department of Labor and related state agencies also apply.

Some of our stores are parties to proceedings under the Comprehensive Environmental Response,Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to formerrecycling, treatment and/or disposal facilities owned and operated by independent businesses. The remedia-tion or clean-up of facilities where the release of a regulated hazardous substance occurred is required underCERCLA and other laws.

We incur significant costs to comply with applicable environmental, health and safety laws andregulations in the ordinary course of our business. We do not anticipate, however, that the costs of suchcompliance will have a material adverse effect on our business, results of operations, cash flows or financialcondition, although such outcome is possible given the nature of our operations and the extensive environmen-tal, public health and safety regulatory framework. We do not have any material known environmentalcommitments or contingencies.

Competition

We operate in a highly competitive industry. We believe that the principal competitive factors in theautomotive retailing business are location, service, price and selection. Each of our markets includes a large

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number of well-capitalized competitors that have extensive automobile store managerial experience and strongretail locations and facilities. According to the National Automotive Dealers Association, Manheim Auctionsand reports of various industry analysts, the automotive retail industry is served by approximately21,500 franchised automotive dealerships and approximately 45,000 independent used vehicle dealers. Severalother public companies operate numerous automotive retail stores on a national or regional basis. We aresubject to competition from dealers that sell the same brands of new vehicles that we sell and from dealers thatsell other brands of new vehicles that we do not represent in a particular market. Our new vehicle storecompetitors have franchise agreements with the various vehicle manufacturers and, as such, generally haveaccess to new vehicles on the same terms as us. Additionally, we are subject to competition in the automotiveretailing business from private market buyers and sellers of used vehicles.

In general, the vehicle manufacturers have designated specific marketing and sales areas within whichonly one dealer of a given vehicle brand may operate. Under most of our framework agreements with thevehicle manufacturers, our ability to acquire multiple dealers of a given brand within a particular market islimited. We are also restricted by various state franchise laws from relocating our stores or establishing newstores of a particular brand within any area that is served by another dealer of the same brand, and wegenerally need the manufacturer to approve the relocation or grant a new franchise in order to relocate orestablish a store. However, to the extent that a market has multiple dealers of a particular brand, as most ofour key markets do with respect to most vehicle brands we sell, we are subject to significant intra-brandcompetition.

We also are subject to competition from independent automobile service shops and service center chains.We believe that the principal competitive factors in the service and repair industry are price, location, the useof factory-approved replacement parts, expertise with the particular vehicle lines and customer service. Inaddition to competition for vehicle sales and service, we face competition from a broad range of financialinstitutions in our finance and insurance and after-market products businesses. We believe the principalcompetitive factors in these businesses are convenience, price, contract terms and the ability to finance vehicleprotection and after-market products.

Insurance And Bonding

Our business exposes us to the risk of liabilities arising out of our operations. For example, liabilities mayarise out of claims of employees, customers or other third parties for personal injury or property damageoccurring in the course of our operations. We could also be subject to fines and civil and criminal penalties inconnection with alleged violations of federal and state laws or regulatory requirements.

The automotive retailing business is also subject to substantial risk of property loss due to the significantconcentration of property values at store locations. In our case in particular, our operations are concentrated instates and regions in which natural disasters and severe weather events (such as hurricanes, earthquakes andhail storms) may subject us to substantial risk of property loss and operational disruption. Under self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims handlingexpenses as part of our various insurance programs, including property and casualty and employee medicalbenefits. Costs in excess of this retained risk per claim may be insured under various contracts with third-partyinsurance carriers. We estimate the ultimate costs of these retained insurance risks based on actuarialevaluation and historical claims experience, adjusted for current trends and changes in claims-handlingprocedures. The level of risk we retain may change in the future as insurance market conditions or otherfactors affecting the economics of our insurance purchasing change. Although we have, subject to certainlimitations and exclusions, substantial insurance, we cannot assure you that we will not be exposed touninsured or underinsured losses that could have a material adverse effect on our business, financial condition,results of operations or cash flows.

Provisions for retained losses and deductibles are made by charges to expense based upon periodicevaluations of the estimated ultimate liabilities on reported and unreported claims. The insurance companiesthat underwrite our insurance require that we secure certain of our obligations for deductible reimbursementswith collateral. Our collateral requirements are set by the insurance companies and, to date, have beensatisfied by posting surety bonds, letters of credit and/or cash deposits. Our collateral requirements may

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change from time to time based on, among other things, our claims experience. We include additional detailsabout our collateral requirements in the ""Management's Discussion and Analysis of Financial Condition andResults of Operations'' section of this document, as well as in the Notes to our Consolidated FinancialStatements.

Employees

As of December 31, 2005, we employed approximately 27,000 full time employees, approximately 320 ofwhom were covered by collective bargaining agreements. We believe that we have good relations with ouremployees.

Seasonality

Our operations generally experience higher volumes of vehicle sales and service in the second and thirdquarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also,demand for vehicles and light trucks is generally lower during the winter months than in other seasons,particularly in regions of the United States where stores may be subject to adverse winter conditions.Accordingly, we expect our revenue and operating results generally to be lower in the first and fourth quartersas compared to the second and third quarters. However, revenue may be impacted significantly from quarterto quarter by actual or threatened severe weather events, and other factors unrelated to weather conditions,such as changing economic conditions and vehicle manufacturer incentive programs.

Trademarks

We own a number of registered service marks and trademarks, including, among other marks,AutoNation » and AutoNation». Pursuant to agreements with vehicle manufacturers, we have the right touse and display manufacturers' trademarks, logos and designs at our stores and in our advertising andpromotional materials, subject to certain restrictions. We also have licenses pursuant to various agreementswith third parties authorizing the use and display of the marks and/or logos of such third parties, subject tocertain restrictions. The current registrations of our service marks and trademarks in the United States andforeign countries are effective for varying periods of time, which we may renew periodically, provided that wecomply with all applicable laws.

Executive Officers Of AutoNation

We provide below information regarding each of our executive officers.Name Age Position

Mike Jackson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 57 Chairman of the Board and Chief Executive Officer

Michael E. Maroone ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52 Director, President and Chief Operating Officer

Craig T. Monaghan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49 Executive Vice President and Chief Financial Officer

Jonathan P. FerrandoÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40 Executive Vice President, General Counsel andSecretary

Kevin P. WestfallÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50 Senior Vice President, Sales

Mike Jackson has served as our Chairman of the Board since January 1, 2003 and as our Chief ExecutiveOfficer and Director since September 1999. From October 1998 until September 1999, Mr. Jackson served asChief Executive Officer of Mercedes-Benz USA, LLC, a North American operating unit of Daimler-Chrysler AG, a multinational automotive manufacturing company. From April 1997 until September 1999,Mr. Jackson also served as President of Mercedes-Benz USA. From July 1990 until March 1997, Mr. Jacksonserved in various capacities at Mercedes-Benz USA, including as Executive Vice President immediately priorto his appointment as President of Mercedes-Benz USA. Mr. Jackson was also the managing partner fromMarch 1979 to July 1990 of Euro Motorcars of Bethesda, Maryland, a regional group that owned and operatedeleven automotive dealership franchises, including Mercedes-Benz and other brands of automobiles.

Michael E. Maroone has served as a director since July 2005 and as our President and Chief OperatingOfficer since August 1999. Following our acquisition of the Maroone Automotive Group in January 1997,Mr. Maroone served as President of our New Vehicle Dealer Division. In January 1998, Mr. Maroone was

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named President of our Automotive Retail Group with responsibility for our new and used vehicle operations.Prior to joining our company, Mr. Maroone was President and Chief Executive Officer of the MarooneAutomotive Group, one of the country's largest privately-held automotive retail groups prior to its acquisitionby us.

Craig T. Monaghan has served as our Executive Vice President and Chief Financial Officer since March2005 and as our Senior Vice President and Chief Financial Officer from May 2000 until March 2005. FromJune 1998 to May 2000, Mr. Monaghan was Chief Financial Officer of iVillage.com, a leading women'snetwork on the Internet. From 1991 until June 1998, Mr. Monaghan served in various executive capacities forReader's Digest Association, Inc., most recently as Vice President and Treasurer. Prior to joining Reader'sDigest, Mr. Monaghan worked in the finance groups of Bristol-Myers Squibb Company and General MotorsCorporation.

Jonathan P. Ferrando has served as our Executive Vice President, General Counsel and Secretary sinceMarch 2005. In September 2004, Mr. Ferrando assumed responsibility for our human resources and laborrelations functions in addition to his role as General Counsel. Mr. Ferrando joined our Company in July 1996and served in various capacities within our company, including as Senior Vice President, General Counsel andSecretary from January 2000 until March 2005 and as Senior Vice President and General Counsel of ourAutomotive Retail Group from March 1998 until January 2000. Prior to joining our Company, Mr. Ferrandowas a corporate attorney with Skadden, Arps, Slate, Meagher & Flom from 1991 until 1996.

Kevin P. Westfall has served as our Senior Vice President Ì Sales since October 2005 and as our SeniorVice President Ì Finance and Insurance and Fixed Operations from May 2003 until September 2005. From2001 until May 2003, Mr. Westfall served as our Senior Vice President Ì Finance and Insurance. Previously,he served as President of our former wholly-owned captive finance company, AutoNation Financial Services,from 1997 through 2001. He is also the former President of BMW Financial Services for North America.

ITEM 1A. RISK FACTORS

Our business, financial condition, results of operations, cash flows and prospects, and the prevailingmarket price and performance of our common stock, may be adversely affected by a number of factors,including the matters discussed below. Certain statements and information set forth in this Annual Report onForm 10-K, as well as other written or oral statements made from time to time by us or by our authorizedofficers on our behalf, constitute ""forward-looking statements'' within the meaning of the Federal PrivateSecurities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by thesafe harbor provisions for forward-looking statements contained in the Private Securities Litigation ReformAct of 1995. You should note that our forward-looking statements speak only as of the date of this AnnualReport on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believethat the expectations, plans, intentions and projections reflected in our forward-looking statements arereasonable, such statements are subject to known and unknown risks, uncertainties and other factors that maycause our actual results, performance or achievements to be materially different from any future results,performance or achievements expressed or implied by the forward-looking statements. The risks, uncertaintiesand other factors that our stockholders and prospective investors should consider include, but are not limitedto, the following:

We are dependent upon the success and continued financial viability of the vehicle manufacturers and

distributors with which we hold franchises.

The success of our stores is dependent on vehicle manufacturers in several key respects. First, we relyexclusively on the various vehicle manufacturers for our new vehicle inventory. Our ability to sell new vehiclesis dependent on a vehicle manufacturer's ability to produce and allocate to our stores an attractive, highquality and desirable product mix at the right time in order to satisfy customer demand. Second, manufactur-ers generally support their franchisees by providing direct financial assistance in various areas, including,among others, inventory financing assistance and advertising assistance. Third, manufacturers provide productwarranties and, in some cases, service contracts, to customers. Our stores perform warranty and servicecontract work for vehicles under manufacturer product warranties and service contracts, and direct bill the

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manufacturer as opposed to invoicing the store customer. At any particular time, we have significantreceivables from manufacturers for warranty and service work performed for customers. In addition, we relyon manufacturers to varying extents for original equipment manufactured replacement parts, training, productbrochures and point of sale materials, and other items for our stores.

The core brands of vehicles that we sell, representing more than 90% of the number of new vehicles thatwe sold in 2005, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda andBMW. In particular, our General Motors Corporation and Ford Motor Company stores represented over 37%of our new vehicle revenue in 2005. We are subject to a concentration of risk in the event of financial distress,including potential bankruptcy, of a major vehicle manufacturer such as General Motors or Ford. In the eventof a bankruptcy by a vehicle manufacturer, among other things: (i) the manufacturer could attempt toterminate all or certain of our franchises, and we may not receive adequate compensation for them, (ii) wemay not be able to collect some or all of our significant receivables that are due from such manufacturer andwe may be subject to preference claims relating to payments made by such manufacturer prior to bankruptcy,(iii) we may not be able to obtain financing for our new vehicle inventory, or arrange financing for ourcustomers for their vehicle purchases and leases, with such manufacturer's captive finance subsidiary, whichmay cause us to finance our new vehicle inventory, and arrange financing for our customers, with alternatefinance sources on less favorable terms, and (iv) consumer demand for such manufacturer's products could bematerially adversely affected. These events may result in a partial or complete write-down of our goodwill,intangible franchise rights with respect to any terminated franchises, and/or receivables due from suchmanufacturers. In addition, vehicle manufacturers may be adversely impacted by economic downturns orrecessions, significant declines in the sales of their new vehicles, increases in interest rates, declines in theircredit ratings, labor strikes or similar disruptions (including within their major suppliers), supply shortages orrising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demandfor their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poorproduct mix or unappealing vehicle design, or other adverse events. These and other risks could materiallyadversely affect any manufacturer and impact its ability to profitably design, market, produce or distribute newvehicles, which in turn could materially adversely affect our business, results of operations, financial condition,shareholders' equity, cash flows and prospects.

The automotive retailing industry is sensitive to changing economic conditions and various other factors.

Our business and results of operations are substantially dependent on new vehicle sales levels in the United

States and in our particular geographic markets and the level of gross profit margins that we can achieve

on our sales of new vehicles, all of which are very difficult to predict.

We believe that many factors affect industry-wide sales of new vehicles and retailers' gross profit margins,including consumer confidence in the economy, the level of manufacturers' excess production capacity,manufacturer incentives (and consumers' reaction to such offers), intense industry competition, interest rates,the prospects of war, other international conflicts or terrorist attacks, severe weather conditions, the level ofpersonal discretionary spending, product quality, affordability and innovation, fuel prices, credit availability,unemployment rates, the number of consumers whose vehicle leases are expiring, and the length of consumerloans on existing vehicles. Significant increases in interest rates, in particular, could significantly impactindustry new vehicle sales and vehicle affordability due to the direct relationship between higher rates andhigher monthly loan payments, a critical factor for many vehicle buyers. Sales of certain new vehicles,particularly larger trucks and sports utility vehicles that historically have provided us with higher grossmargins, also could be impacted adversely by further significant increases in fuel prices, which rosedramatically during 2005. The length of consumer auto loans has increased recently and leasing of vehicles hasdecreased, which may result in customers deferring vehicle purchases in the future.

Our new vehicle sales may differ from industry sales, including due to particular economic conditions andother factors in the geographic markets in which we operate. A significant decrease in new vehicle sales levelsin the United States (or in our particular geographic markets) during 2006 as compared to 2005, or a decreasein new vehicle gross profit margins, could cause our actual earnings results to differ materially from our priorresults and projected trends. Economic conditions and the other factors described above also may materially

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adversely impact our sales of used vehicles, finance and vehicle protection products, vehicle service and partsand repair services.

Our new vehicle sales are impacted by the consumer incentive and marketing programs of vehicle

manufacturers.

Most vehicle manufacturers use incentive and marketing programs to spur consumer demand for theirvehicles, such as 0% financing and manufacturer employee pricing offers. These sales incentive programs areoften not announced in advance and therefore can be difficult to plan for when ordering inventory. In addition,certain manufacturers offer extended product warranties or free service programs to consumers. From time totime, manufacturers modify and discontinue these dealer assistance and consumer incentive and marketingprograms, which could have a significant adverse effect on our new vehicle and aftermarket product sales,consolidated results of operations and cash flows.

Adverse weather events can disrupt our business.

Our stores are concentrated in states and regions in the United States, including primarily Florida, Texasand California, in which actual or threatened natural disasters and severe weather events (such as hurricanes,earthquakes and hail storms) may disrupt our store operations, which may adversely impact our business,results of operations, financial condition and cash flows. In addition to business interruption, the automotiveretailing business is subject to substantial risk of property loss due to the significant concentration of propertyvalues at store locations. Although we have, subject to certain limitations and exclusions, substantialinsurance, we cannot assure you that we will not be exposed to uninsured or underinsured losses that couldhave a material adverse effect on our business, financial condition, results of operations or cash flows.

We are subject to restrictions imposed by, and significant influence from, vehicle manufacturers that may

adversely impact our business, financial condition, results of operations, cash flows and prospects, including

our ability to acquire additional stores.

Vehicle manufacturers and distributors with whom we hold franchises have significant influence over theoperations of our stores. The terms and conditions of our framework, franchise and related agreements and themanufacturers' interests and objectives may, in certain circumstances, conflict with our interests andobjectives. For example, manufacturers can set performance standards with respect to sales volume, saleseffectiveness and customer satisfaction, and can influence our ability to acquire additional stores, the namingand marketing of our stores, the operations of our e-commerce sites, our selection of store management, thecondition of our store facilities, product stocking and advertising spending levels, and the level at which wecapitalize our stores. Manufacturers may also have certain rights to restrict our ability to provide guaranties ofour operating companies, pledges of the capital stock of our subsidiaries and liens on their assets, which couldadversely impact our ability to obtain financing for our business and operations on favorable terms or atdesired levels. From time to time, we are precluded under agreements with certain manufacturers fromacquiring additional franchises, or subject to other adverse actions, to the extent we are not meeting certainperformance criteria at our existing stores (with respect to matters such as sales volume, sales effectivenessand customer satisfaction) until our performance improves in accordance with the agreements, subject toapplicable state franchise laws.

Manufacturers also have the right to establish new franchises or relocate existing franchises, subject toapplicable state franchise laws. The establishment or relocation of franchises in our markets could have amaterial adverse effect on the financial condition, results of operations, cash flows and prospects of our storesin the market in which the franchise action is taken.

Our framework, franchise and related agreements also grant the manufacturer the right to terminate orcompel us to sell our franchise for a variety of reasons (including uncured performance deficiencies, anyunapproved change of ownership or management or any unapproved transfer of franchise rights), subject tostate laws. From time to time, certain major manufacturers assert sales and customer satisfaction performancedeficiencies under the terms of our framework and franchise agreements at a limited number of our stores.While we believe that we will be able to renew all of our franchise agreements, we cannot guarantee that all ofour franchise agreements will be renewed or that the terms of the renewals will be favorable to us. We cannot

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assure you that our stores will be able to comply with manufacturers' sales, customer satisfaction and otherperformance requirements in the future, which may affect our ability to acquire new stores or renew ourfranchise agreements, or subject us to other adverse actions, including termination or compelled sale of afranchise, any of which could have a material adverse effect on our financial condition, results of operations,cash flows and prospects.

In addition, we have granted certain manufacturers the right to acquire, at fair market value, ourautomotive dealerships franchised by that manufacturer in specified circumstances in the event of our defaultunder the indenture for our senior unsecured notes due 2008 or the credit agreement for our revolving creditfacility.

We are subject to numerous legal and administrative proceedings, which, if the outcomes are adverse to us,

could materially adversely affect our business, results of operations, financial condition, cash flows and

prospects.

We are involved, and will continue to be involved, in numerous legal proceedings arising out of theconduct of our business, including litigation with customers, employment-related lawsuits, class actions,purported class actions and actions brought by governmental authorities.

Many of our Texas dealership subsidiaries have been named in three class action lawsuits brought againstthe Texas Automobile Dealers Association (""TADA'') and approximately 700 new vehicle stores in Texasthat are members of the TADA. The three actions allege that since January 1994 Texas dealers have deceivedcustomers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well. In April2002, in two actions (which have been consolidated) the state court certified two classes of consumers onwhose behalf the action would proceed. In the federal antitrust case, in March 2003, the federal courtconditionally certified a class of consumers. We and the other dealership defendants appealed the ruling to theFifth Circuit Court of Appeals, which on October 5, 2004 reversed the class certification order and remandedthe case back to the federal district court for further proceedings. In February 2005, we and the plaintiffs ineach of the cases agreed to settlement terms. The state settlement, which was approved preliminarily by thestate court on December 27, 2005, is contingent upon final court approval, the hearing for which is currentlyscheduled for June 2006. The claims against us in federal court also would be settled contingent upon finalapproval in the state action. The estimated expense of the settlements is not a material amount and includesour stores issuing coupons for discounts off future vehicle purchases, refunding cash in certain circumstances,and paying attorneys' fees and certain costs. Under the terms of the settlements, our stores would be permittedto continue to itemize and pass through to the customer the cost of the inventory tax. If the settlements are notfinally approved, we would then vigorously assert available defenses in connection with the TADA lawsuits.Further, we may have certain rights of indemnification with respect to certain aspects of these lawsuits.However, an adverse resolution of the TADA lawsuits could result in the payment of significant costs anddamages and negatively impact our ability to itemize and pass through to the customer the cost of the tax inthe future, which could have a material adverse effect on our business, results of operations, financialcondition, cash flows and prospects.

In addition to the foregoing cases, we also are a party to numerous other legal proceedings that arose inthe conduct of our business. We do not believe that the ultimate resolution of these matters will have amaterial adverse effect on our business, results of operations, financial condition or cash flows. However, theresults of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more ofthese matters could have a material adverse effect on our business, results of operations, financial condition,cash flows and prospects.

Our operations, including, without limitation, our sales of finance, insurance and vehicle protection

products, are subject to extensive governmental laws, regulation and scrutiny. If we are found to be in

violation of any of these laws or regulations, or if new laws or regulations are enacted that adversely affect

our operations, our business, operating results and prospects could suffer.

The automotive retailing industry, including our facilities and operations, is subject to a wide range offederal, state and local laws and regulations, such as those relating to motor vehicle sales, retail installmentsales, leasing, sales of finance, insurance and vehicle protection products, licensing, consumer protection,

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consumer privacy, escheatment, money laundering, environmental, health and safety, wage-hour, anti-discrimination and other employment practices. Specifically with respect to motor vehicle sales, retailinstallment sales, leasing, and the sale of finance, insurance and vehicle protection products at our stores, weare subject to various laws and regulations, the violation of which could subject us to consumer class action orother lawsuits or governmental investigations and adverse publicity, in addition to administrative, civil orcriminal sanctions. The violation of other laws and regulations to which we are subject also can result inadministrative, civil or criminal sanctions against us, which may include a cease and desist order against thesubject operations or even revocation or suspension of our license to operate the subject business, as well assignificant fines and penalties. We currently devote significant resources to comply with applicable federal,state and local regulation of health, safety, environmental, zoning and land use regulations, and we may needto spend additional time, effort and money to keep our existing or acquired facilities in compliance therewith.

Legislative or similar measures have recently been enacted or pursued in certain states in which weoperate to limit the fees that dealerships may earn in connection with arranging financing for vehiclepurchasers, to require disclosure to consumers of the fees that stores earn to arrange financing and to enactother additional regulations with respect to various aspects of our business, including with respect to the sale ofused vehicles and finance and insurance products. Recent litigation against certain vehicle manufacturers'captive finance subsidiaries alleging discriminatory lending practices has resulted in settlements, and mayresult in future settlements, that could reduce the fees earned by our stores in connection with the originationof consumer loans. The enactment of laws and regulations that materially impair or restrict our finance andinsurance or other operations could have a material adverse effect on our business, results of operations,financial condition, cash flows and prospects.

Our ability to grow our business may be limited by our ability to acquire automotive stores on favorable

terms or at all.

The automotive retail industry is a mature industry. Accordingly, the growth of our automotive retailbusiness since our inception has been primarily attributable to acquisitions of franchised automotive dealershipgroups. As described above, manufacturer approval of our proposed acquisitions generally is subject to ourcompliance with applicable performance standards (including with respect to matters such as sales volume,sales effectiveness and customer satisfaction) or established acquisition limits, particularly regional and localmarket limits. In addition, in the current environment, it has been difficult to identify dealership acquisitionsin our core markets that meet our return on investment targets. As a result, we cannot assure you that we willbe able to acquire stores selling desirable automotive brands at desirable locations in our key markets or thatany such acquisitions can be completed on favorable terms or at all. Acquisitions involve a number of risks,many of which are unpredictable and difficult to quantify or assess, including, among other matters, risksrelating to known and unknown liabilities of the acquired business and projected operating performance.

We are subject to interest rate risk in connection with our vehicle floorplan payable, revolving credit

facility and mortgage facility that could have a material adverse effect on our profitability.

The LIBOR-based interest rates under our revolving credit facility, mortgage facility and certain of ourfloorplan notes payable all increased in 2005, and we anticipate that such rates will increase further in 2006.Our net inventory carrying benefit (floorplan interest expense net of floorplan assistance that we receive fromautomotive manufacturers) has decreased in recent years and we expect to have a net inventory carrying costin 2006. We cannot assure you that a significant increase in interest rates would not have a material adverseeffect on our business, financial condition, results of operations or cash flows.

Our revolving credit facility and the indenture relating to our senior unsecured notes contain certain

restrictions on our ability to conduct our business.

The indenture relating to the 9% senior unsecured notes due August 2008 and the credit agreementrelating to our revolving credit facility contain numerous financial and operating covenants that limit thediscretion of our management with respect to various business matters. These covenants place significantrestrictions on, among other things, our ability to incur additional indebtedness, to create liens or otherencumbrances, to make certain payments (including dividends and repurchases of our shares) and invest-

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ments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. Our revolvingcredit facility also requires us to meet certain financial ratios and tests that may require us to take action toreduce debt or act in a manner contrary to our business objectives. A failure by us to comply with theobligations contained in our revolving credit facility or the indenture could result in an event of default underour revolving credit facility or the indenture, which could permit acceleration of the related debt andacceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. Ifany debt is accelerated, our liquid assets may not be sufficient to repay in full such indebtedness and our otherindebtedness. In addition, we have granted certain manufacturers the right to acquire, at fair market value, ourautomotive stores franchised by that manufacturer in specified circumstances in the event of our default underthe indenture for our senior unsecured notes due August 2008 or the credit agreement for our revolving creditfacility.

We must test our intangible assets for impairment at least annually, which may result in a material, non-

cash write down of goodwill or franchise rights and could have a material adverse impact on our results of

operations and shareholders' equity.

Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually (ormore frequently when events or circumstances indicate that an impairment may have occurred) by applying afair-value based test. Our principal intangible assets are goodwill and our rights under our franchiseagreements with vehicle manufacturers. These impairment assessments may result in a material, non-cashwrite-down of goodwill or franchise values. An impairment would have a material adverse impact on ourresults of operations and shareholders' equity.

ITEM 2. PROPERTIES

We lease our corporate headquarters facility in Fort Lauderdale, Florida pursuant to a lease expiring in2010. As of February 2006, we also own or lease numerous facilities relating to our operations in the following18 states: Alabama; Arizona; California; Colorado; Florida; Georgia; Idaho; Illinois; Maryland; Minnesota;North Carolina; Nevada; New York; Ohio; Tennessee; Texas; Virginia and Washington. These facilitiesconsist primarily of automobile showrooms, display lots, service facilities, collision repair centers, supplyfacilities, automobile storage lots, parking lots and offices. We believe that our facilities are sufficient for ourcurrent needs and are in good condition in all material respects.

ITEM 3. LEGAL PROCEEDINGS

We are involved, and will continue to be involved, in numerous legal proceedings arising out of theconduct of our business, including litigation with customers, employment-related lawsuits, class actions,purported class actions and actions brought by governmental authorities.

Many of our Texas dealership subsidiaries have been named in three class action lawsuits brought againstthe Texas Automobile Dealers Association (""TADA'') and approximately 700 new vehicle stores in Texasthat are members of the TADA. The three actions allege that since January 1994 Texas dealers have deceivedcustomers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well. In April2002, in two actions (which have been consolidated) the state court certified two classes of consumers onwhose behalf the action would proceed. In the federal antitrust case, in March 2003, the federal courtconditionally certified a class of consumers. We and the other dealership defendants appealed the ruling to theFifth Circuit Court of Appeals, which on October 5, 2004 reversed the class certification order and remandedthe case back to the federal district court for further proceedings. In February 2005, we and the plaintiffs ineach of the cases agreed to settlement terms. The state settlement, which was approved preliminarily by thestate court on December 27, 2005, is contingent upon final court approval, the hearing for which is currentlyscheduled for June 2006. The claims against us in federal court also would be settled contingent upon finalapproval in the state action. The estimated expense of the settlements is not a material amount and includesour stores issuing coupons for discounts off future vehicle purchases, refunding cash in certain circumstances,and paying attorneys' fees and certain costs. Under the terms of the settlements, our stores would be permittedto continue to itemize and pass through to the customer the cost of the inventory tax. If the settlements are notfinally approved, we would then vigorously assert available defenses in connection with the TADA lawsuits.

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Further, we may have certain rights of indemnification with respect to certain aspects of these lawsuits.However, an adverse resolution of the TADA lawsuits could result in the payment of significant costs anddamages and negatively impact our ability to itemize and pass through to the customer the cost of the tax inthe future, which could have a material adverse effect on our business, results of operations, financialcondition, cash flows and prospects.

In addition to the foregoing cases, we also are a party to numerous other legal proceedings that arose inthe conduct of our business. We do not believe that the ultimate resolution of these matters will have amaterial adverse effect on our business, results of operations, financial condition or cash flows. However, theresults of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more ofthese matters could have a material adverse effect on our business, results of operations, financial condition,cash flows and prospects.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the fourth quarter of the fiscal year endedDecember 31, 2005.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information, Holders and Dividends

Our common stock is traded on The New York Stock Exchange under the symbol ""AN.'' The followingtable sets forth, for the periods indicated, the high and low sales prices per share of the common stock asreported on the consolidated transaction reporting system.

High Low

2005

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22.84 $18.44

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.54 19.57

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.69 17.91

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.05 18.35

2004

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19.33 $16.24

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.22 15.15

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.69 15.01

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.37 16.06

On February 24, 2006, the closing price of our common stock was $21.35 per share as reported by theNYSE. As of February 24, 2006, there were approximately 2,700 holders of record of our common stock.

We have not declared or paid any cash dividends on our common stock during our two most recent fiscalyears. We do not anticipate paying cash dividends in the foreseeable future. The indenture for our seniorunsecured notes restricts our ability to declare and pay cash dividends.

Information about our equity compensation plans is set forth in Item 12 of this Form 10-K.

Issuer Purchases of Equity Securities

The table below sets forth information with respect to shares of common stock repurchased byAutoNation, Inc. during the three months ended December 31, 2005. See Note 9 of our Notes toConsolidated Financial Statements for additional information regarding our stock repurchase programs.

Total Number ofShares Purchased as Maximum Dollar Value of

Total Number Average Part of Publicly Shares That May Yet Beof Shares Price Paid Announced Purchased Under the

Period Purchased per Share Programs Program (in millions)(1)(2)

October 1, 2005 toOctober 31, 2005ÏÏÏÏ Ì Ì Ì $ 121.2

November 1, 2005 toNovember 30, 2005ÏÏ 1,000,000 $20.52 1,000,000 $ 100.7

December 1, 2005 toDecember 31, 2005 ÏÏ 1,350,000 $21.75 1,350,000 $ 71.3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,350,000 2,350,000

(1) Future share repurchases are subject to limitations contained in the indenture relating to the Company'ssenior unsecured notes.

(2) Shares were repurchased under our stock repurchase program approved by the Company's Board ofDirectors in October 2004, which authorized the Company to repurchase up to $250.0 million of shares.This program does not have an expiration date.

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ITEM 6. SELECTED FINANCIAL DATA

You should read the following Selected Financial Data in conjunction with ""Management's Discussionand Analysis of Financial Condition and Results of Operations,'' our Consolidated Financial Statements andNotes thereto and other financial information included elsewhere in this Form 10-K.

As of and for the Years Ended December 31,

2005 2004 2003 2002 2001(In millions, except per share data)

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,253.4 $19,044.6 $18,280.1 $18,207.7 $18,526.6

Income from continuing operations beforeincome taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 622.9 $ 607.8 $ 611.5 $ 611.2 $ 377.5

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 496.5 $ 433.6 $ 479.2 $ 381.6 $ 232.3

Basic earnings (loss) per share:

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.51 $ 1.49 $ 1.86 $ 1.19 $ .69

Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .38 $ .14 $ (.09) $ .01 $ Ì

Cumulative effect of accountingchange ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì $ (.05) Ì Ì

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.89 $ 1.63 $ 1.71 $ 1.20 $ .70

Diluted earnings (loss) per share:

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.48 $ 1.46 $ 1.81 $ 1.17 $ .69

Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .38 $ .13 $ (.09) $ .01 $ Ì

Cumulative effect of accountingchange ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì $ (.05) Ì Ì

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.85 $ 1.59 $ 1.67 $ 1.19 $ .69

Diluted weighted average common sharesoutstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268.0 272.5 287.0 321.5 335.2

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,824.5 $ 8,698.9 $ 8,823.1 $ 8,502.7 $ 8,065.4

Long-term debt, net of currentmaturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 484.4 $ 797.7 $ 808.5 $ 642.7 $ 647.3

Shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,669.5 $ 4,263.1 $ 3,949.7 $ 3,910.2 $ 3,827.9

See Notes 9, 11, 12, 13, and 15 of Notes to Consolidated Financial Statements for discussion ofshareholders' equity, income taxes, earnings per share, discontinued operations, and acquisitions, respectively,and their effect on comparability of year-to-year data. See ""Item 5. Market for the Registrant's CommonEquity and Related Stockholder Matters'' for a discussion of our dividend policy.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Part I, including matters set forth in the""Risk Factors'' section of this Form 10-K, and our Consolidated Financial Statements and notes theretoincluded elsewhere in this Form 10-K.

Certain reclassifications of amounts previously reported have been made to the accompanying Consoli-dated Financial Statements in order to maintain consistency and comparability between periods presented.

We have restated certain amounts in the 2004 and 2003 Consolidated Statements of Cash Flows fromoperating activities to financing activities to comply with Statement of Financial Accounting Standards(""SFAS'') 95, ""Statement of Cash Flows'' as a result of recent comments to us from the Securities andExchange Commission. For the years ended December 31, 2004 and 2003, $(144.1) million (consisting of$(143.3) million in continuing operations and $(.8) million in discontinued operations) and $(121.2) million(consisting of $(121.3) million in continuing operations and $.1 million in discontinued operations),respectively, which were previously reported as operating activities are reported as a component of financingactivities to reflect the net cash flow uses for floorplan facilities with lenders other than the automotivemanufacturers' captive finance subsidiaries for that franchise (""non-trade lenders''). This change had the

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effect of increasing net cash from operating activities with the related offset in net cash from financingactivities.

Overview

AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As ofDecember 31, 2005, we owned and operated 346 new vehicle franchises from 269 dealerships located in majormetropolitan markets in 17 states, predominantly in the Sunbelt region of the United States. Our stores, whichwe believe include some of the most recognizable and well known in our key markets, sell 37 different brandsof new vehicles. The core brands of vehicles that we sell, representing more than 90% of the new vehicles thatwe sold in 2005, are manufactured by Ford, General Motors, Daimler Chrysler, Toyota, Nissan, Honda andBMW.

We operate in a single industry segment, automotive retailing. We offer a diversified range of automotiveproducts and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicleparts, extended service contracts, vehicle protection products and other aftermarket products. We also arrangefinancing for vehicle purchases through third-party finance sources. We believe that the significant scale ofour operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by,among other things, reducing operating expenses, leveraging our market brands and advertising, improvingasset management and sharing and implementing common processes across all of our stores.

Historically, new vehicle sales have accounted for approximately 60% of our total revenue, but less than30% of our total gross margin. Our parts and service and finance and insurance operations, while comprisingless than 20% of total revenue, contribute approximately 60% of our gross margin. We believe that manyfactors affect industry-wide sales of new and used vehicles and finance and insurance products, and retailers'gross profit margins, including consumer confidence in the economy, the level of manufacturers' excessproduction capacity, manufacturer incentives (and consumers' reaction to such offers), intense industrycompetition, interest rates, the prospects of war, other international conflicts or terrorist attacks, severeweather conditions, the level of personal discretionary spending, product quality, affordability and innovation,fuel prices, credit availability, unemployment rates, the number of consumers whose vehicle leases areexpiring and the length of consumer loans on existing vehicles. Our parts and service business is also impactedby these factors.

In 2005, we had year-over-year overall same store gross profit growth driven by increases in used vehiclesand parts and services. This was despite a challenging fourth quarter of 2005 which was impacted by theeffects of Hurricane Wilma on our Florida stores and soft industry sales. Our performance is attributable toour emphasis on store processes, associate training and expense control.

In 2006, we anticipate that industry-wide new vehicle sales will remain stable (nearly 17 million units) inthe United States and continue to be highly competitive. However, the level of retail sales for 2006 is verydifficult to predict.

For the years ended December 31, 2005 and 2004, we had net income from continuing operations of$395.5 million and $397.1 million, respectively, and diluted earnings per share from continuing operations of$1.48 and $1.46, respectively. During 2005 and 2004, we recorded net income tax benefits in continuingoperations totaling $14.5 million and $25.8 million, respectively, primarily related to resolution of variousincome tax matters. The results for 2005 include $10.6 million after-tax ($17.4 million pre-tax) of premiumand deferred costs recognized as Other Interest Expense related to the repurchase of $123.1 million (facevalue) of our 9% senior unsecured notes. Additionally, the results for 2005 were impacted by higher floorplaninterest expense primarily resulting from higher short-term LIBOR interest rates partially offset by loweraverage new vehicle inventory balances. The net inventory carrying benefit (floorplan interest expense net offloorplan assistance recognized from manufacturers) for 2005 was $3.7 million, a decrease of $31.2 millioncompared to 2004. We expect net floorplan costs to continue to increase in 2006 as we experience increasedinterest rates.

During 2005 and 2004, we had income from discontinued operations totaling $101.0 million and$36.5 million, respectively, net of income taxes. In 2005 and 2004, we recognized gains totaling $110.0 millionand $52.2 million, respectively, included in discontinued operations related to the settlement of various income

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tax matters related to items previously reported in discontinued operations. In 2005 and 2004, we alsorecognized losses totaling $9.0 million and $15.7 million, respectively, net of income taxes, related to storesthat were sold or for which we had entered into a definitive sale agreement. Certain amounts reflected in theaccompanying Consolidated Financial Statements for the years ended December 31, 2005, 2004, and 2003,have been adjusted to classify the results of the stores described above as discontinued operations.

During 2005, we acquired 11.8 million shares of our common stock for an aggregate purchase price of$237.1 million leaving approximately $71.3 million available for share repurchases under the repurchaseprogram authorized by our Board of Directors. The indenture for our senior notes contains restrictions on ourability to make share repurchases. See further discussion under the heading ""Financial Condition.'' During2005, 9.8 million shares of our common stock were issued upon the exercise of stock options resulting inproceeds of $112.8 million.

Critical Accounting Policies

We prepare our Consolidated Financial Statements in conformity with generally accepted accountingprinciples which require us to make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period. Actual outcomes could differ fromthose estimates. Set forth below are the policies that we have identified as critical to our business operationsand the understanding of our results of operations or that involve significant estimates. For detailed discussionof other significant accounting policies see Note 1, Summary of Significant Accounting Policies, of Notes toConsolidated Financial Statements.

Intangible and Long-Lived Assets Ì Intangible and long-lived assets are a significant component of ourconsolidated balance sheets. Our policies regarding the valuation of intangible assets affect the amount offuture amortization and possible impairment charges we may incur. Intangible assets consist primarily of thecost of acquired businesses in excess of the fair value of net assets acquired, using the purchase method ofaccounting.

Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtainedthrough contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, orexchanged, regardless of our intent to do so. Our principal identifiable intangible assets are rights underfranchise agreements with vehicle manufacturers. We generally expect our franchise agreements to survive forthe foreseeable future, and, when the agreements do not have indefinite terms, anticipate routine renewals ofthe agreements without substantial cost. We believe that our franchise agreements will contribute to cashflows for the foreseeable future and have indefinite lives.

Goodwill and intangibles with indefinite lives are tested for impairment annually at June 30 or morefrequently when events or circumstances indicate that impairment may have occurred. We are subject tofinancial statement risk to the extent that intangible assets become impaired due to decreases in the fairmarket value of the related underlying business.

We estimate the depreciable lives of our property, plant and equipment, including leasehold improve-ments, and review them for impairment when events or circumstances indicate that their carrying amountsmay be impaired. We periodically evaluate the carrying value of assets held for sale to determine if, based onmarket conditions, the values of these assets should be adjusted. Although we believe our property, plant andequipment and assets held for sale are appropriately valued, the assumptions and estimates used may changeand we may be required to record impairment charges to reduce the value of these assets.

Revenue Recognition Ì Revenue consists of the sales of new and used vehicles and commissions fromrelated finance and insurance products and sales of parts and services. We recognize revenue in the period inwhich products are sold or services are provided. We recognize vehicle and finance and insurance revenuewhen a sales contract has been executed, the vehicle has been delivered and payment has been received orfinancing has been arranged. Revenue on finance and insurance products represents commissions earned by usfor: (i) loans and leases placed with financial institutions in connection with customer vehicle purchasesfinanced and (ii) vehicle protection products sold. An estimated liability for chargebacks against revenuerecognized from sales of finance and vehicle protection products is established during the period in which the

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related revenue is recognized. We may also participate in future profit, pursuant to retrospective commissionarrangements, that would be recognized over the life of the policies. Rebates, holdbacks, floorplan assistanceand certain other dealer credits received from manufacturers are recorded as offsets to the cost of the vehicleand recognized into income upon the sale of the vehicle or when earned under a specific manufacturerprogram, whichever is later.

Other Ì Additionally, significant estimates have been made by us in the accompanying ConsolidatedFinancial Statements including allowances for doubtful accounts, and for accruals related to self-insuranceprograms, certain legal proceedings and estimated tax liabilities.

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Reported Operating Data

Years Ended December 31,

2005 vs. 2004 2004 vs. 2003

Variance VarianceFavorable/ Favorable/

2005 2004 (Unfavorable) % Variance 2003 (Unfavorable) % Variance($ in millions, except per vehicle data)

Revenue:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,532.2 $11,664.9 $ (132.7) (1.1) $11,228.6 $436.3 3.9Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,430.6 4,236.4 194.2 4.6 4,099.4 137.0 3.3Parts and serviceÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,593.6 2,451.9 141.7 5.8 2,341.3 110.6 4.7Finance and insurance, net ÏÏÏÏ 615.6 608.7 6.9 1.1 578.7 30.0 5.2Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81.4 82.7 (1.3) 32.1 50.6

Total revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,253.4 $19,044.6 $ 208.8 1.1 $18,280.1 $764.5 4.2

Gross profit:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 834.6 $ 833.3 $ 1.3 .2 $ 823.8 $ 9.5 1.2Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 428.0 395.3 32.7 8.3 387.3 8.0 2.1Parts and serviceÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,137.3 1,074.4 62.9 5.9 1,022.6 51.8 5.1Finance and insurance ÏÏÏÏÏÏÏÏ 615.6 608.7 6.9 1.1 578.7 30.0 5.2Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48.2 47.3 .9 31.2 16.1

Total gross profitÏÏÏÏÏÏÏÏÏÏÏ 3,063.7 2,959.0 104.7 3.5 2,843.6 115.4 4.1Selling, general & administrative

expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,175.5 2,108.1 (67.4) (3.2) 2,043.6 (64.5) (3.2)Depreciation and amortization ÏÏÏ 80.7 81.5 0.8 67.6 (13.9)Other losses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5 4.0 3.5 2.9 (1.1)

Operating income ÏÏÏÏÏÏÏÏÏÏ 807.0 765.4 41.6 5.4 729.5 35.9 4.9Floorplan interest expense ÏÏÏÏÏÏÏ (110.7) (79.1) (31.6) (66.5) (12.6)Other interest expense ÏÏÏÏÏÏÏÏÏÏ (63.3) (76.3) 13.0 (71.8) (4.5)Other interest expense Ì senior

note repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏ (17.4) (.6) (16.8) Ì (.6)Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.5 3.5 4.0 3.3 .2Other income (expense), net ÏÏÏÏ (.2) (5.1) 4.9 17.0 (22.1)

Income from continuingoperations beforeincome taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 622.9 $ 607.8 $ 15.1 2.5 $ 611.5 $ (3.7) (.6)

Retail vehicle unit sales:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391,698 402,303 (10,605) (2.6) 396,854 5,449 1.4Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 235,313 234,598 715 .3 232,512 2,086 .9

627,011 636,901 (9,890) (1.6) 629,366 7,535 1.2

Revenue per vehicle retailed:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 29,442 $ 28,995 $ 447 1.5 $ 28,294 $ 701 2.5Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 15,225 $ 14,715 $ 510 3.5 $ 14,413 $ 302 2.1

Gross profit per vehicle retailed:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,131 $ 2,071 $ 60 2.9 $ 2,076 $ (5) (.2)Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,809 $ 1,679 $ 130 7.7 $ 1,652 $ 27 1.6Finance and insurance ÏÏÏÏÏÏÏÏ $ 982 $ 956 $ 26 2.7 $ 919 $ 37 4.0

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Years Ended December 31,

% 2005 % 2004 % 2003

Revenue mix percentages:

New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59.9 61.3 61.4

Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23.0 22.2 22.4

Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.5 12.9 12.8

Finance and insurance, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 3.2 3.2

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .4 .4 .2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 100.0 100.0

Gross profit mix percentages:

New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.2 28.2 29.0

Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.0 13.4 13.6

Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37.1 36.3 36.0

Finance and insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.1 20.6 20.4

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.6 1.5 1.0

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 100.0 100.0

Operating items as a percentage of revenue:

Gross profit:

New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2 7.1 7.3

Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.9 11.4 11.5

Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43.9 43.8 43.7

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.9 15.5 15.6

Selling, general and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.3 11.1 11.2

Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.2 4.0 4.0

Other operating items as a percentage of total gross profit:

Selling, general and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71.0 71.2 71.9

Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.3 25.9 25.7

December 31,

2005 2004

Days supply:

New vehicle (industry standard of selling days, including fleet) ÏÏÏÏÏÏÏÏÏ 56 days 53 days

Used vehicle (trailing 30 days) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 days 37 days

The following table details the net floorplan benefit consisting of floorplan assistance, a component of newvehicle gross profit, and floorplan interest expense.

Years Ended December 31,

Variance Variance2005 2004 2005 vs. 2004 2003 2004 vs. 2003($ in millions)

Floorplan assistance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114.4 $114.0 $ .4 $110.5 $ 3.5

Floorplan interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (110.7) (79.1) (31.6) (66.5) (12.6)

Net inventory carrying benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.7 $ 34.9 $(31.2) $ 44.0 $ (9.1)

24

Same Store Operating Data

We have presented below our operating results on a same store basis to reflect our internal performance.Same store operating results include the results of stores for identical months in both years included in thecomparison, starting with the first month of our ownership or operation.

Years Ended December 31,

VarianceFavorable/

2005 2004 (Unfavorable) % Variance($ in millions, except per vehicle data)

Revenue:New vehicleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,417.1 $11,660.9 $ (243.8) (2.1)Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,383.0 4,231.7 151.3 3.6Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,571.1 2,450.7 120.4 4.9Finance and insurance, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611.9 608.7 3.2 .5Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28.2 28.9 (.7) (2.4)

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,011.3 $18,980.9 $ 30.4 .2

Gross profit:New vehicleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 825.3 $ 833.2 $ (7.9) (.9)Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 422.6 392.2 30.4 7.8Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,126.2 1,073.8 52.4 4.9Finance and insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 611.9 608.7 3.2 .5Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.4 26.7 0.7 2.6

Total gross profitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,013.4 $ 2,934.6 $ 78.8 2.7

Retail vehicle unit sales:New vehicleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 388,748 402,137 (13,389) (3.3)Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 233,887 234,486 (599) (.3)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 622,635 636,623 (13,988) (2.2)

Revenue per vehicle retailed:New vehicleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 29,369 $ 28,997 $ 372 1.3Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 15,183 $ 14,717 $ 466 3.2

Gross profit per vehicle retailed:New vehicleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,123 $ 2,072 $ 51 2.5Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,807 $ 1,678 $ 129 7.7Finance and insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 983 $ 956 $ 27 2.8

Years EndedDecember 31,

% 2005 % 2004

Revenue mix percentages:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60.1 61.4Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23.1 22.3Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.5 12.9Finance and insurance, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.2 3.2Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .1 .2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 100.0

Gross profit mix percentages:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.4 28.4Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.0 13.4Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37.4 36.6Finance and insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20.3 20.7Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .9 .9

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 100.0

Operating items as a percentage of revenue:Gross profit:

New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2 7.1Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.9 11.4Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43.8 43.8

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.9 15.5

25

New Vehicle

Years Ended December 31,

2005 vs. 2004 2004 vs. 2003

Variance VarianceFavorable/ Favorable/

2005 2004 (Unfavorable) % Variance 2003 (Unfavorable) % Variance($ in millions, except per vehicle data)

Reported:

RevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,532.2 $11,664.9 $ (132.7) (1.1) $11,228.6 $436.3 3.9

Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 834.6 $ 833.3 $ 1.3 .2 $ 823.8 $ 9.5 1.2

Retail vehicle unit sales ÏÏÏÏÏÏÏ 391,698 402,303 (10,605) (2.6) 396,854 5,449 1.4

Revenue per vehicle retailed ÏÏÏ $ 29,442 $ 28,995 $ 447 1.5 $ 28,294 $ 701 2.5

Gross profit per vehicle retailed $ 2,131 $ 2,071 $ 60 2.9 $ 2,076 (5) (.2)

Gross profit as a percentage ofrevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2 7.1 7.3

Days supply (industry standardof selling days, includingfleet) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56 days 53 days

Same Store:

RevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,417.1 $11,660.9 $ (243.8) (2.1)

Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 825.3 $ 833.2 $ (7.9) (.9)

Retail vehicle unit sales ÏÏÏÏÏÏÏ 388,748 402,137 (13,389) (3.3)

Revenue per vehicle retailed ÏÏÏ $ 29,369 $ 28,997 $ 372 1.3

Gross profit per vehicle retailed $ 2,123 $ 2,072 $ 51 2.5

Gross profit as a percentage ofrevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2% 7.1%

The following table details the net floorplan benefit consisting of floorplan assistance, a component of newvehicle gross profit, and floorplan interest expense.

Years Ended December 31,

Variance Variance2005 2004 2005 vs. 2004 2003 2004 vs. 2003($ in millions)

Floorplan assistance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114.4 $114.0 $ .4 $110.5 $ 3.5

Floorplan interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (110.7) (79.1) (31.6) (66.5) (12.6)

Net inventory carrying benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3.7 $ 34.9 $(31.2) $ 44.0 $ (9.1)

Reported new vehicle performance for 2005 benefited from the impact of acquisitions and divestitureswhen compared to same store performance.

Same store new vehicle revenue for 2005 decreased compared to 2004 primarily as a result of a samestore unit volume decrease partially offset by an increase in revenue per unit. In June 2005, General Motorsannounced an ""employee pricing for everyone'' program, which was followed in July 2005 with similarprograms by Ford and Chrysler. Although these programs helped drive unit volume during 2005, a challengingUnited States auto retail environment and the effects of Hurricane Wilma on our Florida stores negativelyimpacted same store new vehicle unit volume during the fourth quarter of 2005. Despite higher gas prices,rising interest rates, and a shift in consumer preferences from trucks to crossover vehicles and cars, weexpanded revenue per vehicle retailed and gross profit per vehicle retailed through our focus on pricing andprofitability and management of our new vehicle inventory levels and a shift in mix from domestics to importsand luxury.

New vehicle revenue for 2004 increased compared to 2003 driven by increases in revenue per unit andunit volume. The increase in average revenue per unit retailed was attributable to increased dealer incentivesand a shift in mix to more expensive trucks and luxury vehicles. The increase in unit volume was attributableto the impact of acquisitions in 2004, partially offset by a decrease in same store unit volume consistent withindustry trends for our brand and market mix in part due to the four major hurricanes that caused storeclosings and substantial disruption of our business throughout Florida and the Southeast during the thirdquarter of 2004. During the fourth quarter of 2004, we saw improvements in these markets driven by post-

26

hurricane demand and a stronger local economy. Gross profit and gross profit as a percentage of revenuedecreased during 2004 due to intense competition at the retail level and high average inventory levels duringthe year.

At December 31, 2005, our new vehicle inventories were at $2.2 billion or 56 days supply compared tonew vehicle inventories of $2.1 billion or 53 days supply at December 31, 2004. In 2006, we anticipate thatnew vehicle sales in the United States will remain stable (nearly 17 million units) and continue to be highlycompetitive. However, the level of retail sales for 2006 is very difficult to predict.

The net inventory carrying benefit (floorplan interest expense net of floorplan assistance from manufac-turers) decreased in 2005 compared to 2004, primarily as a result of increased floorplan interest expense dueto higher short-term LIBOR interest rates partially offset by lower average new vehicle inventory balances.We expect net floorplan costs to continue to increase in 2006 as we experience increased interest rates.

27

Used VehicleYears Ended December 31,

2005 vs. 2004 2004 vs. 2003

Variance VarianceFavorable/ Favorable/

2005 2004 (Unfavorable) % Variance 2003 (Unfavorable) % Variance($ in millions, except per vehicle data)

Reported:Retail revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,582.6 $3,452.1 $130.5 3.8 $3,351.3 $100.8 3.0Wholesale revenue ÏÏÏÏÏÏÏÏÏÏ 848.0 784.3 63.7 8.1 748.1 36.2 4.8

Total revenue ÏÏÏÏÏÏÏÏÏÏÏÏ $4,430.6 $4,236.4 $194.2 4.6 $4,099.4 $137.0 3.3

Retail gross profit ÏÏÏÏÏÏÏÏÏÏÏ $ 425.6 $ 393.8 $ 31.8 8.1 $ 384.1 $ 9.7 2.5

Wholesale gross profit ÏÏÏÏÏÏÏ 2.4 1.5 .9 3.2 (1.7)

Total gross profit ÏÏÏÏÏÏÏÏÏ $ 428.0 $ 395.3 $ 32.7 8.3 $ 387.3 $ 8.0 2.1

Retail vehicle unit salesÏÏÏÏÏÏ 235,313 234,598 715 .3 232,512 2,086 .9Revenue per vehicle retailed ÏÏ $ 15,225 $ 14,715 $ 510 3.5 $ 14,413 $ 302 2.1Gross profit per vehicle

retailedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,809 $ 1,679 $ 130 7.7 $ 1,652 $ 27 1.6Gross profit as a percentage of

retail revenue ÏÏÏÏÏÏÏÏÏÏÏÏ 11.9% 11.4% 11.5%Days supply (trailing 30 days) 43 days 37 days

Same Store:Retail revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,551.1 $3,450.9 $100.2 2.9

Wholesale revenue ÏÏÏÏÏÏÏÏÏÏ 831.9 780.8 51.1 6.5

Total revenue ÏÏÏÏÏÏÏÏÏÏÏÏ $4,383.0 $4,231.7 $151.3 3.6

Retail gross profit ÏÏÏÏÏÏÏÏÏÏÏ $ 422.7 $ 393.4 $ 29.3 7.4Wholesale gross profit ÏÏÏÏÏÏÏ (.1) (1.2) 1.1

Total gross profit ÏÏÏÏÏÏÏÏÏ $ 422.6 $ 392.2 $ 30.4 7.8

Retail vehicle unit salesÏÏÏÏÏÏ 233,887 234,486 (599) (.3)Revenue per vehicle retailed ÏÏ $ 15,183 $ 14,717 $ 466 3.2Gross profit per vehicle

retailedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,807 $ 1,678 $ 129 7.7Gross profit as a percentage of

retail revenue ÏÏÏÏÏÏÏÏÏÏÏÏ 11.9% 11.4%

Reported used vehicle performance benefited from the impact of acquisitions and divestitures whencompared to same store performance.

Same store used vehicle revenue for 2005 increased compared to 2004 due to an increase in same storeaverage revenue per vehicle retailed partially offset by a slight decrease in same store unit volume. Theincrease in same store average revenue per unit is the result of strengthened used vehicle market prices and theavailability of quality used vehicles from trade-ins. Consistent with the new vehicle unit volume decline, usedvehicle unit volume was impacted by lower same store sales unit volumes resulting from a challenging UnitedStates' auto retail environment and the effects of Hurricane Wilma on our Florida stores during the fourthquarter of 2005. Same store gross profit and same store gross profit as a percentage of revenue increased as aresult of better inventory management focused on optimizing used vehicle inventory supply, mix and pricing.

Used vehicle revenue for 2004 increased compared to 2003 as a result of increases in average revenue perunit and volume. The increase in used vehicle unit volume is attributable to the impact of acquisitions in 2004partially offset by same store unit volume declines in part due to strong manufacturer incentives for newvehicles and the effect of the four major hurricanes on our stores in Florida and the Southeast during the thirdquarter of 2004. During the fourth quarter of 2004, we saw improvements in these markets driven by post-hurricane demand and a stronger local economy. Gross profit for 2004 compared to 2003 increased due toacquisitions. Gross profit as a percentage of revenue for 2004 increased as a result of an improved inventorymix and a strengthening used vehicle market toward the end of 2004.

Used vehicle inventories were at $329.3 million or 43 days supply at December 31, 2005 compared to$290.2 million or 37 days in 2004.

28

Parts and Service

Years Ended December 31,

2005 vs. 2004 2004 vs. 2003

Variance VarianceFavorable/ Favorable/

2005 2004 (Unfavorable) % Variance 2003 (Unfavorable) % Variance($ in millions, except per vehicle data)

Reported:

RevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,593.6 $2,451.9 $141.7 5.8 $2,341.3 $110.6 4.7

Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,137.3 $1,074.4 $ 62.9 5.9 $1,022.6 $ 51.8 5.1

Gross profit as a percentage ofrevenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43.9% 43.8% 43.7%

Same Store:

RevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,571.1 $2,450.7 $120.4 4.9

Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,126.2 $1,073.8 $ 52.4 4.9

Gross profit as a percentage ofrevenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43.8% 43.8%

Parts and service revenue is primarily derived from repair orders for service labor and related parts paiddirectly by customers or via reimbursement from manufacturers and others under warranties.

Reported parts and service revenue and gross profit benefited from the impact of acquisitions anddivestitures when compared to same store performance.

Despite one and a half less service days in the current year compared to prior year and the businessdisruption in our Florida stores due to the effects of Hurricane Wilma, same store parts and service revenue for2005 increased compared to 2004 due to increases in customer-paid and warranty work as well as our partswholesale business. Same store parts and service gross profit for 2005 increased compared to 2004 due toincreases in customer-paid and warranty work. The improvements are attributable in part to our service driveprocess, maintenance menus and service marketing program, as well as the continued optimization of ourpricing models and training programs.

Parts and service revenue and gross profit increased during 2004 due to increases in customer-paid workfor parts and service, attributable to the continued implementation of our service drive process, maintenancemenu and service marketing program, as well as optimization of our pricing models and training programs.Parts and service was also impacted by the effect of the four major hurricanes on our stores in Florida and theSoutheast during the third quarter of 2004. During the fourth quarter of 2004, we saw improvements in thesemarkets driven by post-hurricane demand and a stronger local economy. Results in 2004 benefited from anadditional service day as compared to 2003.

29

Finance and Insurance

Years Ended December 31,

2005 vs. 2004 2004 vs. 2003

Variance VarianceFavorable/ Favorable/

2005 2004 (Unfavorable) % Variance 2003 (Unfavorable) % Variance($ in millions, except per vehicle data)

Reported:

Revenue and gross profit ÏÏÏ $615.6 $608.7 $6.9 1.1 $578.7 $30.0 5.2

Gross profit per vehicleretailed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 982 $ 956 $ 26 2.7 $ 919 $ 37 4.0

Same Store:

Revenue and gross profit ÏÏÏ $611.9 $608.7 $3.2 .5

Gross profit per vehicleretailed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 983 $ 956 $ 27 2.8

Reported finance and insurance revenue and gross profit benefited from the impact of acquisitions anddivestitures when compared to same store performance.

Same store finance and insurance revenue and gross profit increased slightly in 2005 compared to 2004.The improvement was driven by increased retrospective commissions received on extended service contractspartially offset by decreased new and used vehicle sales, which were caused in part due to the effects ofHurricane Wilma on our Florida stores. Improvements were also driven by our continued emphasis on trainingstore associates. Substantially higher interest rates in the future may negatively impact finance and insurancerevenue and gross profit.

Finance and insurance revenue and gross profit increased for 2004 due to increased vehicle revenue,product penetration and retrospective commissions received on extended service contracts. Additionally, ourimprovement has been driven by our ongoing concentration on our underperforming stores and our transparentsales process that is supported by the ""AutoNation Pledge.'' The ""AutoNation Pledge'' is our commitment toprovide our customers with disclosures relating to the finance and insurance sales process. Finance andinsurance revenue and gross profit were also impacted by the effect of the four major hurricanes on our storesin Florida and the Southeast during the third quarter of 2004. During the fourth quarter of 2004, we sawimprovements in these markets driven by post-hurricane demand and a stronger local economy.

30

Operating Expenses

Selling, General and Administrative Expenses

During 2005 selling, general and administrative expenses increased $67.4 million or 3.2%. As a percent oftotal gross profit, selling, general and administrative expenses decreased 20 basis points in spite of propertydamage costs related to Hurricane Wilma which impacted our Florida stores during the fourth quarter of2005. Improvements are due to our continued efforts to leverage our cost structure, particularly in the areas ofcompensation and other selling, general and administrative expenses, partially offset by increased occupancycosts.

As a percent of total gross profit, selling, general and administrative expenses decreased 70 basis pointsduring 2004. Our cost structure was targeted for vehicle sales volumes and gross margins that did notmaterialize through the third quarter of 2004. During the fourth quarter, our results benefited from increasedvehicle sales, as well as cost-control and productivity improvements. Throughout 2004, we continued toleverage our cost structure, especially in the areas of compensation and, to a lesser extent, advertising andoccupancy costs. Occupancy costs benefited from lease buy-outs completed in 2004. Additionally, inSeptember 2004, we announced a new streamlined regional structure.

Non-Operating Income (Expense)

Floorplan Interest Expense

Floorplan interest expense was $110.7 million, $79.1 million and $66.5 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. The increase in 2005 compared to 2004 is primarily theresult of higher short-term LIBOR interest rates partially offset by lower average new vehicle inventory levels.The increase in 2004 compared to 2003 is primarily the result of higher average inventory levels and higherinterest rates.

Other Interest Expense

Other interest expense was incurred primarily on borrowings under mortgage facilities and outstandingsenior unsecured notes. Other interest expense was $63.3 million, $76.3 million and $71.8 million for the yearsended December 31, 2005, 2004 and 2003, respectively. Other interest expense also includes interest related tothe IRS settlement (as discussed in the ""Provision for Income Taxes'' section) totaling $4.8 million and$12.1 million for the years ended December 31, 2004 and 2003, respectively, which represents interest dueunder the agreement from the date of the settlement. The decrease in 2005 compared to 2004 of other interestexpense is primarily due to the repurchase of a portion of our senior unsecured notes. The increase in otherinterest expense for 2004 compared to 2003, excluding amounts related to the IRS settlement, is primarily dueto higher average debt outstanding.

Other Interest Expense Ì Senior Note Repurchases

During 2005 and 2004, we repurchased $123.1 million and $3.4 million (face value) of our 9.0% seniorunsecured notes at an average price of 110.5% and 114.3% of face value or $136.0 million and $3.9 million,respectively. The $12.9 million and $.5 million premium paid for this repurchase plus related deferred costs of$4.5 million and $.1 million, respectively, were recognized as Other Interest Expense- Senior Note Repur-chases in the accompanying 2005 and 2004 Consolidated Income Statements.

Other Income (Expense), Net

Other income in 2003 primarily relates to the sale of our interest in an equity-method investment in LKQCorporation, an auto parts recycling business, for $38.3 million, resulting in a pre-tax gain of $16.5 million.

31

Provision for Income Taxes

The effective income tax rate was 36.5%, 34.7%, and 15.2% for the years ended December 31, 2005, 2004and 2003, respectively. Income taxes are provided based upon our anticipated underlying annual blendedfederal and state income tax rates, adjusted, as necessary, for any other tax matters occurring during theperiod. As we operate in various states, our effective tax rate is also dependent upon our geographic revenuemix. In February 2006, we made estimated state tax and federal tax payments totaling approximately$100 million, primarily related to provisions for the third and fourth quarter of 2005.

In March 2003, we entered into a settlement agreement with the IRS with respect to the tax treatment ofcertain transactions we entered into in 1997 and 1999. As a result of the settlement, during 2003, werecognized an income tax benefit of $127.5 million from the reduction of previously recorded deferred taxliabilities. In 2003, we made a $366.0 million prepayment of the initial installment due March 2004, includinginterest. Additionally, in 2004, we prepaid the remaining balance due related to the IRS settlement totaling$128.9 million, including accrued interest.

During 2005, 2004 and 2003, we recorded net income tax benefits in our provision for income taxes of$14.5 million, $25.8 million and $140.9 million (which includes $127.5 million recognized as a result of theIRS settlement discussed above), respectively, primarily related to the resolution of various income taxmatters. In 2005 and 2004, we also recognized gains totaling $110.0 million and $52.2 million, respectively,included in Discontinued Operations related to the settlement of various income tax matters.

A federal income tax audit for 2002 through 2004 is being conducted by the IRS. In addition, we areroutinely audited by the states in which we do business and remain under examination by various states. Wecould experience additional state and federal tax adjustments in the future as we continue to work throughvarious tax matters. Once we resolve our open tax matters, we expect our effective tax rate to beapproximately 39.5%.

See Note 11, Income Taxes, of the Notes to Consolidated Financial Statements for further information.

Financial Condition

At December 31, 2005, we had $243.8 million of unrestricted cash and cash equivalents. ThroughJuly 14, 2005, we had two revolving credit facilities with an aggregate borrowing capacity of $500.0 million.There were no borrowings on these revolving credit facilities during 2005 and 2004. On July 14, 2005, weterminated these credit facilities and entered into a new five-year revolving credit facility with an aggregateborrowing capacity of $600.0 million with investment-grade terms, including lower credit spreads compared tothe facilities it replaced. The facility is guaranteed by substantially all of our subsidiaries. We have negotiateda letter of credit sub-limit as part of our revolving credit facility. The amount available to be borrowed underthe $600.0 million multi-year revolving credit facility is reduced on a dollar-for-dollar basis by the cumulativeamount of any outstanding letters of credit, which totaled $87.6 million at December 31, 2005.

In the ordinary course of business, we are required to post performance and surety bonds, letters of credit,and/or cash deposits as financial guarantees of our performance. At December 31, 2005, surety bonds, lettersof credit and cash deposits totaled $120.3 million, including $87.6 million in letters of credit. We are notrequired to provide cash collateral for outstanding letters of credit.

We also have $321.7 million of outstanding 9.0% senior unsecured notes due August 1, 2008. During2005, we repurchased $123.1 million (face value) of senior unsecured notes at an average price of 110.5% offace value or $136.0 million. For 2005, the premium paid for this repurchase was $12.9 million plus relateddeferred financing costs of $4.5 million, which was recognized as Other Interest Expense in the accompanying2005 Consolidated Income Statement. Through December 31, 2005, cumulative repurchases of seniorunsecured notes, which began during the fourth quarter of 2004, totaled $126.5 million (face value). Thesenior unsecured notes are guaranteed by substantially all of our subsidiaries.

Our senior unsecured notes, revolving credit facility and mortgage facility contain numerous customaryfinancial and operating covenants that place significant restrictions on us, including our ability to incur

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additional indebtedness or repay existing indebtedness, to create liens or other encumbrances, to sell (orotherwise dispose of) assets and merge or consolidate with other entities. The indenture for our seniorunsecured notes places significant restrictions on our ability to make certain payments (including dividendsand share repurchases) and investments. The revolving credit facility also requires that we meet certainfinancial ratios including financial covenants requiring the maintenance of a maximum consolidated cash flowleverage ratio and a maximum capitalization ratio. In addition, the senior unsecured notes contain a minimumfixed charge coverage ratio covenant, and the mortgage facility contains both maximum cash flow leverageratio and minimum interest coverage ratio covenants. In the event that we were to default in the observance orperformance of any of the financial covenants in the revolving credit facility or mortgage facilities and suchdefault were to continue beyond any cure period or waiver, the lender under the respective facility could electto terminate the facility and declare all outstanding obligations under such facility immediately payable.Under the senior unsecured notes, should we be in violation of the financial covenants, we could be limited inincurring certain additional indebtedness. Our revolving credit facility, the indenture for our senior unsecurednotes, vehicle floorplan payable facilities and mortgage facilities have cross-default provisions that trigger adefault in the event of an uncured default under other material indebtedness. At December 31, 2005, we werein compliance with the requirements of all such financial covenants. The credit spread for the revolving creditfacility is impacted by our senior unsecured credit ratings.

During 2005, we repaid $164.4 million of the outstanding balance under mortgage facilities with certainautomotive manufacturers' captive finance subsidiaries, which includes prepayments totaling $154.0 million.At December 31, 2005, we had $153.7 million outstanding under a mortgage facility. The facility bearsinterest at LIBOR-based interest rates (5.2% and 3.5% weighted average for 2005 and 2004, respectively) andis secured by mortgages on certain of our stores properties.

At December 31, 2005 and 2004, vehicle floorplan payable-trade totaled $2.4 billion for both years.Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific vehicleinventories with manufacturers' captive finance subsidiaries. Vehicle floorplan payable-non-trade totaled$104.0 million and $80.0 million, at December 31, 2005 and 2004, respectively, and represents amountspayable borrowed to finance the purchase of specific vehicle inventories with non-trade lenders. All theCompany's floorplan facilities are at LIBOR-based rates of interest (4.8% and 3.0% weighted average for 2005and 2004, respectively). Secured floorplan facilities are used to finance new vehicle inventories and theamounts outstanding thereunder are due on demand, but are generally paid within several business days afterthe related vehicles are sold. Floorplan facilities are primarily collateralized by new vehicle inventories andrelated receivables. Our manufacturer agreements generally require that the manufacturer have the ability todraft against the floorplan facilities so that the lender directly funds the manufacturer for the purchase ofinventory. The floorplan facilities contain certain financial and operational covenants. At December 31, 2005,we were in compliance with such covenants in all material respects. At December 31, 2005, aggregate capacityunder the floorplan credit facilities to finance new vehicles was approximately $3.9 billion, of which$2.5 billion total was outstanding.

We sell and receive commissions on the following types of vehicle protection and other products:extended warranties, guaranteed auto protection, credit insurance, lease ""wear and tear'' insurance and theftprotection products. The products we offer include products that are sold and administered by independentthird parties, including the vehicle manufacturers' captive finance subsidiaries. Pursuant to our arrangementswith these third-party finance and vehicle protection product providers, we primarily sell the products on astraight commission basis; however, we may sell the product, recognize commission and participate in futureprofit pursuant to retrospective commission arrangements. Through 2002, we assumed some of the underwrit-ing risk through reinsurance agreements with our captive insurance subsidiaries. Since January 1, 2003, wehave not reinsured any new extended warranties or credit insurance products. We maintain restricted cash intrust accounts in accordance with the terms and conditions of certain reinsurance agreements to secure thepayments of outstanding losses and loss adjustment expenses related to our captive insurance subsidiaries.

During 2005, we repurchased 11.8 million shares of our common stock in the open market for anaggregate purchase price of $237.1 million leaving $71.3 million authorized for share repurchases. Repur-

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chases are made pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Future sharerepurchases are also subject to limitations contained in the indenture relating to our senior unsecured notes.

On June 30, 2000, we completed the tax-free spin-off of ANC Rental Corporation (""ANC Rental''),which operated our former rental business. In connection with the spin-off, we agreed to provide certainguarantees on behalf of ANC Rental. In 2001, ANC Rental filed voluntary petitions for reorganization underChapter 11 of the U.S. Bankruptcy Code. In 2003, the bankruptcy court approved a settlement agreementamong AutoNation, ANC Rental and the Committee of Unsecured Creditors in the bankruptcy.

Pursuant to the Settlement Agreement, we continued to guarantee $29.5 million, and committed toguarantee up to an additional $10.5 million, in surety bonds supporting obligations of the Rental Business untilDecember 2006. In 2004, we were released from our $29.5 million guarantee obligation and our remaining$10.5 million surety bond guarantee obligations. This triggered an obligation under the Settlement Agreementfor us to pay $20 million (one-half of the permanent reduction of the surety bond guarantee obligations) to atrust established for the benefit of the unsecured creditors in the bankruptcy, which payment was made in2004. We had previously incurred a pre-tax charge of $20.0 million ($12.3 million after-tax) for this liabilityincluded in Loss from Discontinued Operations in the accompanying Consolidated Income Statements during2003.

As a matter of course, we are regularly audited by various tax authorities. From time to time, these auditsresult in proposed assessments. Other tax accruals totaled $54.5 million and $181.3 million at December 31,2005 and 2004, respectively, and relate to various tax matters where the ultimate resolution may result in usowing additional tax payments. We believe that our tax positions comply with applicable tax law and that wehave adequately provided for these matters. We completed the federal income tax audit for the years 1997through 2001 and a federal income tax audit for 2002 through 2004 is being conducted by the IRS. We remainunder examination by various states. We could experience additional state and federal tax adjustments in thefuture as we continue to work through various tax matters. Once we resolve our open tax matters, we expectour base effective tax rate to be approximately 39.5%. See Note 11, Income Taxes, of Notes to ConsolidatedFinancial Statements for additional discussion of income taxes.

Cash Flows

Cash and cash equivalents increased (decreased) by $135.6 million, $(66.9) million and $(8.0) millionduring the years ended December 31, 2005, 2004 and 2003, respectively. The major components of thesechanges are discussed below. We have revised our 2004 and 2003 Consolidated Statements of Cash Flows toseparately disclose the operating, investing and financing cash flows attributable to our discontinuedoperations. We had previously reported these amounts on a combined basis.

We have restated certain amounts in the 2004 and 2003 Consolidated Statements of Cash Flows fromoperating activities to financing activities to comply with Statement of Financial Accounting Standards(""SFAS'') 95, ""Statement of Cash Flows,'' as a result of recent comments to us from the Securities andExchange Commission. For the years ended December 31, 2004 and 2003, $(144.1) million (consisting of$(143.3) million in continuing operations and $(.8) million in discontinued operations) and $(121.2) million(consisting of $(121.3) million in continuing operations and $.1 million in discontinued operations),respectively, which were previously reported as operating activities are reported as a component of financingactivities to reflect the net cash flow uses for floorplan facilities with lenders other than the automotivemanufacturers' captive finance subsidiaries for that franchise (""non-trade lenders''). This change had theeffect of increasing net cash from operating activities with the related offset in net cash from financingactivities.

Cash Flows from Operating Activities

Cash provided by operating activities was $579.9 million, $563.6 million and $481.3 million for the yearsended December 31, 2005, 2004 and 2003, respectively.

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Cash flows from operating activities include net income adjusted for non-cash items and the effects ofchanges in working capital including changes in vehicle floorplan payable-trade (vehicle floorplan payableswith the automotive manufacturers' captive finance subsidiary for the related franchise), which directly relatesto changes in new vehicle inventory for those franchises. Additionally, we paid portions of the IRS settlementtotaling $128.9 million and $366.0 million during 2004 and 2003, respectively, representing the entire balanceof the amount due under the settlement.

In December 2001, we decided to exit the business of underwriting retail automobile loans for customersat our stores, which we determined was not a part of our core automotive retail business. In July 2003, we soldall of our finance receivables portfolio for proceeds totaling $52.4 million, resulting in no gain or loss on thetransaction. Collections of installment loans receivable and other items related to the wind-down of thisbusiness totaled $27.0 million for the year ended December 31, 2003.

Cash used in discontinued operations was $4.3 million, $22.6 million and $1.2 million during 2005, 2004and 2003, respectively. A portion of the cash used in 2005 and 2004 and all of the cash used in 2003 relates topayments made in conjunction with property leases assumed from ANC Rental.

Cash Flows from Investing Activities

Cash flows from investing activities consist primarily of cash used in capital additions, activity frombusiness acquisitions, property dispositions, purchases and sales of investments and other transactions asfurther described below.

Capital expenditures, excluding property operating lease buy-outs, were $131.5 million, $132.9 millionand $122.4 million during the years ended December 31, 2005, 2004 and 2003, respectively. We will makefacility and infrastructure upgrades and improvements from time to time as we identify projects that arerequired to maintain our current business or that we expect to provide us with acceptable rates of return. Weexpect 2006 capital expenditures of approximately $130 million, excluding any acquisition-related spending orlease buy-outs.

Property operating lease buy-outs were $10.3 million, $77.7 million and $9.8 million for the years endedDecember 31, 2005, 2004 and 2003, respectively. We continue to analyze certain of our higher cost operatingleases and evaluate alternatives in order to lower the effective financing costs.

Proceeds from the disposal of assets held for sale were $33.4 million, $37.9 million and $23.1 millionduring the years ended December 31, 2005, 2004 and 2003, respectively. These amounts are primarily fromthe sales of megastores and other properties held for sale.

Cash used in business acquisitions, net of cash acquired, was $15.9 million, $197.9 million and$48.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. During 2005, we acquiredtwo automotive retail franchises and other related assets. Cash used in business acquisitions during 2005, 2004and 2003 includes $9.9 million, $3.3 million and $3.2 million in deferred purchase price for certain prior yearautomotive retail acquisitions. See discussion in Note 15, Acquisitions, of Notes to Consolidated FinancialStatements.

During 2003, we sold all of our interest in an equity-method investment in LKQ Corporation, an autoparts recycling business, for $38.3 million, resulting in a pre-tax gain of $16.5 million.

Cash Flows from Financing Activities

Cash flows from financing activities primarily include treasury stock purchases, stock option exercises,debt activity and changes in vehicle floorplan payable-non-trade.

We have repurchased approximately 11.8 million, 14.1 million and 39.2 million shares of our commonstock during the years ended December 31, 2005, 2004 and 2003, respectively, for an aggregate price of$237.1 million, $236.8 million, and $575.2 million, respectively, under our Board-approved share repurchaseprograms.

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During 2005, we repaid $164.4 million of amounts outstanding under our mortgage facilities, includingprepayments totaling $154.0 million. During the year ended December 31, 2003, we drew amounts totaling$183.6 million under our mortgage facilities.

Cash flows from financing activities include changes in vehicle floorplan payable-non-trade (vehiclefloorplan payables with lenders other than the automotive manufacturers' captive finance subsidiaries for thatfranchise) totaling $24.0 million, $(143.3) million and $(121.3) million for the years ended December 31,2005, 2004 and 2003, respectively.

During the years ended December 31, 2005, 2004 and 2003, proceeds from the exercises of stock optionswere $112.8 million, $94.2 million and $118.1 million, respectively.

During 2005 and 2004, we repurchased $123.1 million and $3.4 million (face value) of our 9.0% seniorunsecured notes at an average price of 110.5% and 114.3% of face value or $136.0 million and $3.9 million,respectively.

Other cash used in financing activities totaled $7.8 million in 2003 and primarily includes upfrontpremium amounts paid in conjunction with interest rate hedge transactions.

Liquidity

In July 2005, we terminated our existing credit facilities with aggregate borrowing capacity of$500.0 million, and entered into a new five-year revolving credit facility with an aggregate borrowing capacityof $600.0 million. We believe that our funds generated through future operations and availability of borrowingsunder our secured floorplan facilities (for new vehicles) and revolving credit facility will be sufficient toservice our debt and fund our working capital requirements, pay our tax obligations, commitments andcontingencies and meet any seasonal operating requirements for the foreseeable future. We do not foresee anydifficulty in continuing to comply with covenants of our various financing facilities. At December 31, 2005, wehave available capacity under our revolving credit facility and available cash totaling approximately$750 million, net of outstanding letters of credit.

We have not declared or paid any cash dividends on our common stock during our three most recentfiscal years. We do not anticipate paying cash dividends in the foreseeable future. The indenture for our seniorunsecured notes restricts our ability to declare cash dividends.

Contractual Payment Obligations

The following table summarizes our payment obligations under certain contracts at December 31, 2005(in millions):

Payments Due by Period

Less Than More ThanTotal one Year 1-3 Years 3-5 Years 5 Years

Total vehicle floorplan payable (Note 3)*ÏÏÏÏÏÏ $2,540.0 $2,540.0 $ Ì $ Ì $ Ì

Notes payable and long-term debt (Note 7)*ÏÏÏ 525.0 40.6 425.8 58.6 Ì

Operating lease commitments (Note 8)*ÏÏÏÏÏÏÏ 470.5 57.7 100.2 74.7 237.9

Acquisition purchase price commitments ÏÏÏÏÏÏÏ 1.0 1.0 Ì Ì Ì

Purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116.6 39.1 34.0 27.5 16.0

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,653.1 $2,678.4 $560.0 $160.8 $253.9

* See Notes to Consolidated Financial Statements.

In the ordinary course of business, we are required to post performance and surety bonds, letters of credit,and/or cash deposits as financial guarantees of our performance. At December 31, 2005, surety bonds, lettersof credit and cash deposits totaled $120.3 million, including $87.6 million letters of credit. We do not currentlyprovide cash collateral for outstanding letters of credit. We have negotiated a letter of credit sub-limit as part

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of our revolving credit facility. The amount available to be borrowed under this revolving credit facility isreduced on a dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit.

As further discussed under the heading ""Financial Condition,'' there are various tax matters where theultimate resolution may result in us owing additional tax payments.

In March 2006, we acquired a Mercedes-Benz dealership in Pompano Beach, Florida. We also signed aseparate agreement in January 2006 to acquire certain rights to establish a new Mercedes-Benz dealership inPalm Beach County, Florida.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements as of December 31, 2005 and 2004.

Seasonality

Our operations generally experience higher volumes of vehicle sales and service in the second and thirdquarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also,demand for vehicles and light trucks is generally lower during the winter months than in other seasons,particularly in regions of the United States where stores may be subject to adverse winter conditions.Accordingly, we expect our revenue and operating results to be generally lower in our first and fourth quartersas compared to our second and third quarters. However, revenue may be impacted significantly from quarterto quarter by actual or threatened severe weather events, and by other factors unrelated to weather conditions,such as changing economic conditions and automotive manufacturer incentives programs.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (""FASB'') issued SFAS 123R, ""Share-Based Payment,'' a revision of SFAS 123. In March 2005, the SEC issued Staff Accounting Bulletin No. 107(SAB 107) regarding its interpretation of SFAS 123R. The standard requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees. In accordance withthe revised statement, we will begin to recognize the expense attributable to stock options granted or vestedsubsequent to December 31, 2005 using the modified prospective method in the first quarter of 2006. We willcontinue using the Black-Scholes valuation model and straight-line amortization of compensation expenseover the requisite service period of the grant. Based on an estimate of unvested stock options that have beenissued through December 31, 2005, and potential future option grants consistent with levels in 2005, we expectcompensation expense during 2006 related to stock-based awards consistent with the pro forma disclosuresunder SFAS 123 for 2005.

In December 2004, the FASB issued SFAS 151, ""Inventory Costs''. SFAS 151 requires abnormalamounts of inventory costs related to idle facility, freight, handling and wasted materials to be recognized ascurrent period expenses. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is notexpected to have a material impact on our consolidated financial statements.

In March 2005, the FASB issued Interpretation (""FIN'') No. 47, ""Accounting for Conditional AssetRetirement Obligations Ì an Interpretation of FASB Statement No. 143.'' This Interpretation clarifies thetiming of liability recognition for legal obligations associated with an asset retirement when the timing and(or) method of settling obligations are conditional on a future event that may or may not be within the controlof the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Theadoption of FIN 47 did not have an impact on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, ""Accounting Changes and Error Corrections'' whichreplaces Accounting Principles Board Opinion (""APB'') No. 20, ""Accounting Changes'', and SFAS No. 3,""Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.''SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning afterDecember 15, 2005 and is not expected to have a material effect on our consolidated financial statements.

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In September 2005, the Emerging Issues Task Force (""EITF'') reached a consensus on issueEITF 05-06, ""Determining the Amortization Period for Leasehold Improvements Purchased after LeaseInception or Acquired in a Business Combination.'' EITF 05-06 requires that leasehold improvements that areplaced in service significantly after and not contemplated at or near the beginning of the lease term or that areacquired in a business combination should be amortized over the shorter of the useful life of the assets or aterm that includes the required lease periods and renewals that are deemed to be reasonably assured as of thedate the leasehold improvements are purchased or the date of acquisition, as applicable. EITF 05-06 iseffective the first reporting period beginning after June 29, 2005. The adoption of EITF 05-06 did not have amaterial impact on our consolidated financial statements.

In October 2005, the FASB issued FASB Staff Position (""FSP'') No. FAS 13-1, ""Accounting for RentalCosts Incurred during a Construction Period.'' FSP No. FAS 13-1 requires rental costs associated withoperating leases that are incurred during a construction period to be recognized as rental expense.FSP No. FAS 13-1 is effective for reporting periods beginning after December 15, 2005 and is not expected tohave a material impact on our consolidated financial statements.

Forward Looking Statements

Our business, financial condition, results of operations, cash flows and prospects, and the prevailingmarket price and performance of our common stock, may be adversely affected by a number of factors,including the matters discussed below. Certain statements and information set forth in this Annual Report onForm 10-K, as well as other written or oral statements made from time to time by us or by our authorizedexecutive officers on our behalf, constitute ""forward-looking statements'' within the meaning of the FederalPrivate Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be coveredby the safe harbor provisions for forward-looking statements contained in the Private Securities LitigationReform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safeharbor provisions. You should note that our forward-looking statements speak only as of the date of thisAnnual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise ourforward-looking statements, whether as a result of new information, future events or otherwise. Although webelieve that the expectations, plans, intentions and projections reflected in our forward-looking statements arereasonable, such statements are subject to known and unknown risks, uncertainties and other factors that maycause our actual results, performance or achievements to be materially different from any future results,performance or achievements expressed or implied by the forward-looking statements. The risks, uncertaintiesand other factors that our stockholders and prospective investors should consider include, but are not limitedto, the following:

‚ We are dependent upon the success and continued financial viability of the vehicle manufacturers anddistributors with which we hold franchises.

‚ The automotive retailing industry is sensitive to changing economic conditions and various otherfactors. Our business and results of operations are substantially dependent on new vehicle sales levels inthe United States and in our particular geographic markets and the level of gross profit margins that wecan achieve on our sales of new vehicles, all of which are very difficult to predict.

‚ Our new vehicle sales are impacted by the consumer incentive programs of vehicle manufacturers.

‚ Adverse weather events can disrupt our business.

‚ We are subject to restrictions imposed by, and significant influence from, vehicle manufacturers thatmay adversely impact our business, financial condition, results of operations, cash flows and prospects,including our ability to acquire additional stores.

‚ We are subject to numerous legal and administrative proceedings, which, if the outcomes are adverseto us, could materially adversely affect our business, results of operations, financial condition, cashflows and prospects.

‚ Our operations, including, without limitation, our sales of finance and insurance and vehicle protectionproducts, are subject to extensive governmental laws, regulation and scrutiny. If we are found to be in

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violation of any of these laws or regulations, or if new laws or regulations are enacted that adverselyaffect our operations, our business, operating results and prospects could suffer.

‚ Our ability to grow our business may be limited by our ability to acquire automotive stores on favorableterms or at all.

‚ We are subject to interest rate risk in connection with our vehicle floorplan payable, revolving creditfacility and mortgage facility that could have a material adverse effect on our profitability.

‚ Our revolving credit facility and the indenture relating to our senior unsecured notes contain certainrestrictions on our ability to conduct our business.

‚ We must test our intangible assets for impairment at least annually, which may result in a material,non-cash write-down of goodwill or franchise rights and could have a material adverse impact on ourresults of operations and shareholders' equity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure is increasing interest rates. Our policy is to manage interest ratesthrough the use of a combination of fixed and floating rate debt. At December 31, 2005 and 2004, fixed ratedebt, primarily consisting of amounts outstanding under senior unsecured notes, totaled $371.3 million and$494.5 million, respectively, and had a fair value of $398.5 million and $561.5 million, respectively. Interestrate derivatives may be used to hedge a portion of our variable rate debt when appropriate based upon marketconditions.

Interest Rate Risk

At December 31, 2005 and 2004, we had variable rate vehicle floorplan payable Ì trade and vehiclefloorplan payable Ì non-trade totaling $2.5 billion for both years. Based on these amounts at December 31,2005 and 2004, a 100 basis point change in interest rates would result in an approximate $25.4 million and$24.6 million, respectively, change to our annual floorplan interest expense. Our exposure to changes ininterest rates with respect to total vehicle floorplan payable is partially mitigated by manufacturers' floorplanassistance.

At December 31, 2005 and 2004, we had other variable rate debt outstanding totaling $153.7 million and$318.1 million, respectively. Based on the amounts outstanding at December 31, 2005 and 2004, a 100 basispoint change in interest rates would result in an approximate $1.5 million and $3.2 million change to interestexpense, respectively.

Hedging Risk

We reflect the current fair value of all derivatives on our balance sheet. The related gains or losses onthese transactions are deferred in stockholders' equity as a component of accumulated other comprehensiveincome (loss). These deferred gains and losses are recognized in income in the period in which the relateditems being hedged are recognized in expense. However, to the extent that the change in value of a derivativecontract does not perfectly offset the change in the value of the items being hedged, that ineffective portion isimmediately recognized in income. All of our interest rate hedges are designated as cash flow hedges. We havea series of interest rate hedge transactions with a notional value of $800 million, consisting of a combination ofswaps, and cap and floor options (collars). The hedge instruments are designed to convert certain floating ratevehicle floorplan payable and portions of our mortgage facilities to fixed rate debt. We have $200 million inswaps, which started in 2004 and effectively lock in a LIBOR-based rate of approximately 3.0%, and$600 million in collars that cap floating rates to a maximum LIBOR-based rate no greater than 2.4%. All ofour hedge instruments mature between February 2006 and July 2006. At December 31, 2005 and 2004, netunrealized gains (losses), net of income taxes, related to hedges included in Accumulated Other Comprehen-sive Income (Loss) were $2.1 million and $(1.5) million, respectively. For the years ended December 31,2005, 2004 and 2003, the income statement impact from interest rate hedges was an additional income(expense) of $.2 million, $(2.9) million and $(.6) million, respectively. At December 31, 2005 and 2004, allof our derivative contracts were determined to be highly effective, and no ineffective portion was recognized inincome.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Reports of Independent Registered Public Accounting FirmÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41

Consolidated Balance Sheets as of December 31, 2005 and 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43

Consolidated Income Statements for the Years Ended December 31, 2005, 2004 and 2003ÏÏÏÏÏÏÏÏÏ 44

Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years EndedDecember 31, 2005, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 45

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 (restatedand revised) and 2003 (restated and revised) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46

Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 47

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Report of Independent Registered Public Accounting Firm

The Board of Directors and ShareholdersAutoNation, Inc.:

We have audited the 2005, 2004 and 2003 consolidated financial statements of AutoNation, Inc. andsubsidiaries (the Company) as listed in the Index at Item 8. These consolidated financial statements are theresponsibility of the Company's management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of the Company as of December 31, 2005 and 2004 and the results of theiroperations and their cash flows for the years ended December 31, 2005, 2004 and 2003 in conformity withU.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the effectiveness of the Company's internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report datedMarch 2, 2006, expressed an unqualified opinion on management's assessment of, and the effective operationof, internal control over financial reporting.

As discussed in Note 1 of the Notes to the consolidated financial statements, the consolidated statementsof cash flows for the years ended December 31, 2004 and 2003 have been restated.

/s/ KPMG LLP

March 2, 2006Fort Lauderdale, FloridaCertified Public Accountants

41

Report of Independent Registered Public Accounting Firm

The Board of Directors and ShareholdersAutoNation, Inc.:

We have audited management's assessment, included in the accompanying Management's Report onInternal Control Over Financial Reporting, appearing under Item 9A that AutoNation, Inc. (the Company)maintained effective internal control over financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). The Company's management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express an opinion on management's assessment and an opinion onthe effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operating effectiveness of internal control,and performing such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. A company's internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company's assets that could have a material effect on thefinancial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective internal control overfinancial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteriaestablished in Internal Control Ì Integrated Framework issued by the COSO. Also, in our opinion, theCompany maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control Ì Integrated Framework issued by theCOSO.

We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the 2005, 2004 and 2003 consolidated financial statements of the Company as listed inthe Index at Item 8, and our report dated March 2, 2006 expressed an unqualified opinion on thoseconsolidated financial statements.

/s/ KPMG LLP

March 2, 2006Fort Lauderdale, FloridaCertified Public Accountants

42

AUTONATION, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31,

(In millions, except share and per share data)

2005 2004

ASSETS

CURRENT ASSETS:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 243.8 $ 108.2

Receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 795.7 760.0

InventoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,682.7 2,576.0

Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 158.2 304.2

Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,880.4 3,748.4

PROPERTY AND EQUIPMENT, NET ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,832.3 1,796.2

INTANGIBLE ASSETS, NET ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,957.1 2,946.7

OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 154.7 207.6

Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,824.5 $8,698.9

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Vehicle floorplan payable Ì trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,436.0 $2,378.0

Vehicle floorplan payable Ì non-trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104.0 80.0

Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214.4 176.9

Notes payable and current maturities of long-term obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40.6 14.9

Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 617.1 761.2

Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,412.1 3,411.0

LONG-TERM DEBT, NET OF CURRENT MATURITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 484.4 797.7

DEFERRED INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 186.2 156.8

OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72.3 70.3

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY:

Preferred stock, par value $.01 per share; 5,000,000 shares authorized; none issued Ì Ì

Common stock, par value $.01 per share; 1,500,000,000 shares authorized;273,562,137 shares issued in both periods, including shares held in treasury ÏÏÏÏ 2.7 2.7

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,201.0 2,240.0

Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,672.5 2,176.0

Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.8 (1.5)

Treasury stock, at cost; 11,329,650 and 9,300,007 shares held, respectively ÏÏÏÏÏÏÏ (208.5) (154.1)

Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,669.5 4,263.1

Total Liabilities and Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $8,824.5 $8,698.9

The accompanying notes are an integral part of these statements.

43

AUTONATION, INC.

CONSOLIDATED INCOME STATEMENTS

For the Years Ended December 31,

(In millions, except per share data)

2005 2004 2003

Revenue:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,532.2 $11,664.9 $11,228.6Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,430.6 4,236.4 4,099.4Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,593.6 2,451.9 2,341.3Finance and insurance, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 615.6 608.7 578.7Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 81.4 82.7 32.1

TOTAL REVENUE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,253.4 19,044.6 18,280.1

Cost of Sales:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,697.6 10,831.6 10,404.8Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,002.6 3,841.1 3,712.1Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,456.3 1,377.5 1,318.7Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.2 35.4 .9

TOTAL COST OF SALESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,189.7 16,085.6 15,436.5

Gross Profit:New vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 834.6 833.3 823.8Used vehicle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 428.0 395.3 387.3Parts and service ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,137.3 1,074.4 1,022.6Finance and insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 615.6 608.7 578.7Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 48.2 47.3 31.2

TOTAL GROSS PROFITÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,063.7 2,959.0 2,843.6

Selling, general and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,175.5 2,108.1 2,043.6Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80.7 81.5 67.6Other losses, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.5 4.0 2.9

OPERATING INCOMEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 807.0 765.4 729.5Floorplan interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (110.7) (79.1) (66.5)Other interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (63.3) (76.3) (71.8)Other interest expense Ì senior note repurchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17.4) (.6) ÌInterest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.5 3.5 3.3Other income (expense), net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.2) (5.1) 17.0

INCOME FROM CONTINUING OPERATIONS BEFORE INCOMETAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 622.9 607.8 611.5

PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 227.4 210.7 92.8

NET INCOME FROM CONTINUING OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 395.5 397.1 518.7Income (loss) from discontinued operations, net of income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101.0 36.5 (24.9)

NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTINGCHANGEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 496.5 433.6 493.8

Cumulative effect of accounting change, net of income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (14.6)

NET INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 496.5 $ 433.6 $ 479.2

BASIC EARNINGS (LOSS) PER SHARE:Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.51 $ 1.49 $ 1.86Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .38 $ .14 (.09)Cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì (.05)Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.89 $ 1.63 $ 1.71Weighted average common shares outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262.7 266.7 279.5

DILUTED EARNINGS (LOSS) PER SHARE:Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.48 $ 1.46 $ 1.81Discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .38 $ .13 $ (.09)Cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ (.05)Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.85 $ 1.59 $ 1.67Weighted average common shares outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268.0 272.5 287.0

COMMON SHARES OUTSTANDING, net of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262.2 264.3 269.7

The accompanying notes are an integral part of these statements.

44

AUTONATION, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE

INCOME

For the Years Ended December 31, 2005, 2004 and 2003

(In millions, except share data)

AccumulatedOther

Compre-Additional hensive Compre-

Common Stock Paid-In Retained Income Treasury hensiveShares Amount Capital Earnings (Loss) Stock Income

BALANCE AT DECEMBER 31,2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 333,505,325 3.3 3,044.1 1,263.2 4.2 (404.6)

Comprehensive income:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 479.2 Ì Ì $ 479.2Other comprehensive income (loss):

Unrealized losses on cash flowhedges, restricted investments,marketable securities and interest-only strip receivablesÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (7.4) Ì (7.4)

Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì $ 471.8

Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (575.2)Treasury stock cancellation ÏÏÏÏÏÏÏÏÏÏ (50,000,000) (.5) (592.5) Ì Ì 593.0Exercise of stock options, including

income tax benefit of $24.1 ÏÏÏÏÏÏÏÏ 10,056,812 .1 128.7 Ì Ì 13.4OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .7 Ì Ì Ì

BALANCE AT DECEMBER 31,2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 293,562,137 2.9 2,581.0 1,742.4 (3.2) (373.4)

Comprehensive income:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 433.6 Ì Ì $ 433.6Other comprehensive income:

Unrealized gains on cash flowhedges, restricted investmentsand marketable securities ÏÏÏÏÏÏ Ì Ì Ì Ì 1.7 Ì 1.7

Comprehensive incomeÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì $ 435.3

Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (236.8)Treasury stock cancellation ÏÏÏÏÏÏÏÏÏÏ (20,000,000) (.2) (318.2) Ì Ì 318.4Exercise of stock options, including

income tax benefit of $20.7 ÏÏÏÏÏÏÏÏ Ì Ì (22.8) Ì Ì 137.7

BALANCE AT DECEMBER 31,2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 273,562,137 $ 2.7 $2,240.0 $2,176.0 $(1.5) $(154.1)

Comprehensive income:Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 496.5 Ì Ì $ 496.5Other comprehensive income:

Unrealized gains on cash flowhedges, restricted investmentsand marketable securities ÏÏÏÏÏÏ Ì Ì Ì Ì 3.3 Ì 3.3

Comprehensive incomeÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì $ 499.8

Purchases of treasury stock ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì (237.1)Exercise of stock options, including

income tax benefit of $30.9 ÏÏÏÏÏÏÏÏ Ì Ì (39.0) Ì Ì 182.7

BALANCE AT DECEMBER 31,2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 273,562,137 $ 2.7 $2,201.0 $2,672.5 $ 1.8 $(208.5)

The accompanying notes are an integral part of these statements.

45

AUTONATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

(In millions)

2005 2004 2003

(Restated (Restatedand and

Revised)* Revised)*

CASH PROVIDED BY OPERATING ACTIVITIES:Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 496.5 $ 433.6 $ 479.2Adjustments to reconcile net income to net cash provided by operating activities:

Cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 14.6Loss (gain) on discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (101.0) (36.5) 24.9Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80.7 81.5 67.6Amortization of debt issue costs and discounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.7 6.6 6.0Interest expense on bond repurchase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12.9 .5 ÌIncome taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196.9 160.7 (40.5)Non-cash restructuring and impairment charges, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.2) Ì 25.3Gain on sale of investment in LKQ Corporation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (16.5)Proceeds from sale of finance receivable portfolio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 52.4Collection of installment loan receivables and other related itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 27.0Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.2) 4.8 3.0Changes in assets and liabilities, net of effects from business combinations and

divestitures:Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (78.8) (10.1) (10.1)Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (101.4) 230.0 (388.3)Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.0 (10.7) 12.7Vehicle floorplan payable Ì trade, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52.0 (85.8) 607.1Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37.5 6.1 13.8IRS settlement payment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (128.9) (366.0)Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (50.4) (65.6) (29.7)

Net cash provided by continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 584.2 586.2 482.5Net cash used in discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4.3) (22.6) (1.2)

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 579.9 563.6 481.3

CASH USED IN INVESTING ACTIVITIES:Purchases of property and equipment, excluding property operating lease buy-outs ÏÏÏÏÏÏÏ (131.5) (132.9) (122.4)Property operating lease buy-outsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10.3) (77.7) (9.8)Proceeds from sale of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .5 2.9 1.5Proceeds from disposal of assets held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.4 37.9 23.1Cash used in business acquisitions, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (15.9) (197.9) (48.8)Net change in restricted cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.0 13.2 58.1Purchases of restricted investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23.9) (17.8) (26.9)Proceeds from the sales of restricted investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.4 22.6 ÌProceeds from sale of investment in LKQ CorporationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 38.3Cash received from business divestitures, net of cash relinquished ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55.0 19.4 ÌOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.3) (.5) 14.3

Net cash used in continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (48.6) (330.8) (72.6)Net cash provided by (used in) discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.6 .8 (1.0)

Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (42.0) (330.0) (73.6)

CASH USED IN FINANCING ACTIVITIES:Purchases of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (237.1) (236.8) (575.2)Net proceeds (payments) of vehicle floor plan payable Ì non-trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.0 (143.3) (121.3)Proceeds from mortgage facilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì .2 183.6Payments of mortgage facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (164.4) (11.7) (9.0)Repurchase of senior unsecured notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (136.0) (3.9) ÌProceeds (payments) of notes payable and long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.3) 1.6 (4.2)Proceeds from the exercises of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112.8 94.2 118.1Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (7.8)

Net cash used in continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (402.0) (299.7) (415.8)Net cash provided by (used in) discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.3) (.8) .1

Net cash used in financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (402.3) (300.5) (415.7)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 135.6 (66.9) (8.0)CASH AND CASH EQUIVALENTS at beginning of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108.2 175.1 183.1

CASH AND CASH EQUIVALENTS at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 243.8 $ 108.2 $ 175.1

* See Note 1 to the Consolidated Financial Statements

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tables in millions, except per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

AutoNation, Inc. (the ""Company''), through its subsidiaries, is the largest automotive retailer in theUnited States. As of December 31, 2005, the Company owned and operated 346 new vehicle franchises from269 stores located in major metropolitan markets in 17 states, predominantly in the Sunbelt region of theUnited States. The Company offers a diversified range of automotive products and services, including newvehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts,vehicle protection products and other aftermarket products. The Company also arranges financing for vehiclepurchases through third-party finance sources.

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of AutoNation, Inc. and itssubsidiaries. All of the Company's automotive dealership subsidiaries are indirectly wholly owned by theparent company, AutoNation, Inc. The Company operates in a single industry segment, automotive retailing.The Company sells new and used vehicles, vehicle maintenance and repair services, vehicle parts, andfinancing and insurance products. All intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenue and expenses during the reporting period. Significant estimates made by theCompany in the accompanying Consolidated Financial Statements include allowances for doubtful accounts,accruals for chargebacks against revenue recognized from the sale of finance and insurance products, certainassumptions related to intangible and long-lived assets, and for accruals related to self-insurance programs,certain legal proceedings and estimated tax liabilities.

Certain reclassifications of amounts previously reported have been made to the accompanying Consoli-dated Financial Statements in order to maintain consistency and comparability between periods presented.

Restatement and Revision

The Company has restated certain amounts in the 2004 and 2003 Consolidated Statements of Cash Flowsfrom operating activities to financing activities to comply with Statement of Financial Accounting Standards(""SFAS'') 95, ""Statement of Cash Flows,'' as a result of recent comments to the Company from theSecurities and Exchange Commission. Amounts that were previously reported as operating activities havebeen restated as a component of financing activities to reflect the net cash flow uses for floorplan facilities withlenders other than the automotive manufacturers' captive finance subsidiaries for that franchise (""non-tradelenders''). This change had the effect of increasing net cash from operating activities with the related offset innet cash from financing activities.

Additionally, the Company has revised its 2004 and 2003 Consolidated Statements of Cash Flows as aresult of recent guidance given by the Securities and Exchange Commission to separately disclose theoperating, investing and financing cash flows attributable to the Company's discontinued operations. TheCompany had previously reported these amounts on a combined basis.

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

A summary of the effects of the restatement and revision is as follows:

For the Years EndedDecember 31,

2004 2003

Net cash provided by operating activities as previously reported ÏÏÏÏÏÏÏÏÏÏÏ $ 441.8 $ 365.8Restatement of vehicle floorplan notes payable Ì non-trade:

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 143.3 121.3Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .8 (.1)

Revision of discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22.3) (5.7)

Restated and revised net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏ $ 563.6 $ 481.3

Net cash used in investing activities as previously reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(330.5) $ (72.5)Revision of discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .5 (1.1)

Revised net cash used in investing activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(330.0) $ (73.6)

Net cash used in financing activities as previously reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(156.4) $(294.5)Restatement of vehicle floorplan notes payable Ì non-trade:

Continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (143.3) (121.3)Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.8) .1

Restated and revised net cash used in financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(300.5) $(415.7)

For the Year Ended For the Year EndedDecember 31, 2004 December 31, 2003

As AsPreviously As Previously AsReported Restated Reported Restated

Vehicle floorplan payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(226.2)* Ì $497.2* Ì

Vehicle floorplan payable Ì trade, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì (85.8) $ Ì 607.1

Net payments of vehicle floorplan payable Ì non-trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì (143.3) $ Ì (121.3)

Vehicle floorplan payable Ì non-trade (discontinuedoperations) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì (.8) $ Ì .1

* Includes $3.7 million and $11.3 million of discontinued operations for the years ended December 31, 2004and 2003, respectively.

In May 2005, the FASB issued SFAS No. 154, ""Accounting Changes and Error Corrections'' whichreplaces Accounting Principles Board Opinion (""APB'') No. 20, ""Accounting Changes'', and SFAS No. 3,""Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28.''SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.SFAS 154 is effective for accounting changes and a correction of errors made in fiscal years beginning afterDecember 15, 2005 and is not expected to have a material effect on the Company's Consolidated FinancialStatements.

Cumulative Effect of Accounting Change

As of January 1, 2003, the Company adopted Emerging Issues Task Force (""EITF'') Issue No. 02-16,""Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.''EITF 02-16, as it applies to the Company, addresses the recognition of certain manufacturer allowances andrequires that manufacturer allowances be treated as a reduction of inventory cost unless specifically identified

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

as reimbursement for services or costs incurred. The adoption of EITF 02-16 resulted in a cumulative effect ofaccounting change, net of $9.1 million of income tax, totaling $14.6 million to reflect the deferral of certainallowances, primarily floorplan assistance, into inventory cost in 2003. Additionally, the adoption ofEITF 02-16 impacted the accounting for certain manufacturers' advertising allowances resulting in areclassification that increased Selling, General and Administrative Expenses and, correspondingly, reducedCost of Sales by $18.6 million for the year ended December 31, 2003 to reflect these allowances as a reductionof Cost of Sales.

Inventory

Inventory consists primarily of new and used vehicles held for sale valued using the specific identificationmethod. Cost includes acquisition, reconditioning, dealer installed accessories and transportation expenses.Parts and accessories are valued at the lower of cost (first-in, first-out) or market.

In December 2004, the FASB issued SFAS 151, ""Inventory Costs'', SFAS 151 requires abnormalamounts of inventory costs related to idle facility, freight, handling and wasted materials to be recognized ascurrent period expenses. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is notexpected to have a material impact on the Company's consolidated financial statements.

Investments

Investments, included in Other Assets in the accompanying Consolidated Balance Sheets, consist ofmarketable securities. Restricted investments, included in Other Assets, consist primarily of marketablecorporate and government debt securities. Marketable securities include investments in debt and equitysecurities and are primarily classified as available for sale and are stated at fair value with unrealized gains andlosses included in Accumulated Other Comprehensive Income (Loss) in the Company's ConsolidatedBalance Sheets. Other-than-temporary declines in investment values are recorded as a component of OtherIncome (Expense), Net in the Company's Consolidated Income Statements. Fair value is estimated based onquoted market prices.

Property and Equipment, net

Property and equipment are recorded at cost. Expenditures for major additions and improvements arecapitalized, while minor replacements, maintenance and repairs are charged to expense as incurred. Whenproperty is retired or otherwise disposed of, the cost and accumulated depreciation are removed from theaccounts and any resulting gain or loss is reflected in Other Losses (Gains), Net in the Consolidated IncomeStatements.

Depreciation is provided over the estimated useful lives of the assets involved using the straight-linemethod. Leasehold improvements are amortized over the estimated useful life of the asset or the respectivelease term, whichever is shorter. The estimated useful lives are: fifteen to forty years for buildings andimprovements, three to ten years for equipment and seven to ten years for furniture and fixtures.

The Company continually evaluates property and equipment, including leasehold improvements, todetermine whether events and circumstances have occurred that may warrant revision of the estimated usefullife or whether the remaining balance should be evaluated for possible impairment. The Company uses anestimate of the related undiscounted cash flows over the remaining life of the property and equipment inassessing whether an asset has been impaired. The Company measures impairment losses based upon theamount by which the carrying amount of the asset exceeds the fair value. Fair values generally are estimatedusing prices for similar assets and/or discounted cash flows.

In March 2005, the FASB issued Interpretation (""FIN'') No. 47, Accounting for Conditional AssetRetirement Obligation Ì an Interpretation of FASB Statement No. 143.'' This interpretation clarifies the

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

timing of liability recognition for legal obligations association with an asset retirement when the timing and(or) method of settling the obligation are conditional on a future event that may or may not be within thecontrol of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005.The adoption of FIN 47 did not have an impact on the Company's consolidated financial statements.

Intangible Assets, net

The Company accounts for acquisitions using the purchase method. Additionally, acquired intangibleassets are separately recognized if the benefit of the intangible asset is obtained through contractual or otherlegal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of theCompany's intent to do so. Other intangibles with definite lives are amortized primarily over three to sixteenyears using a straight-line method.

The Company's principal identifiable intangible assets are rights under franchise agreements with vehiclemanufacturers. The Company generally expects its franchise agreements to survive for the foreseeable futureand, when the agreements do not have indefinite terms, anticipates routine renewals of the agreements withoutsubstantial cost. The contractual terms of the Company's franchise agreements provide for various durations,ranging from one year to no expiration date, and in certain cases manufacturers have undertaken to renew suchfranchises upon expiration so long as the dealership is in compliance with the terms of the agreement.However, in general, the states in which the Company operates have automotive dealership franchise laws thatprovide that, notwithstanding the terms of any franchise agreement, it is unlawful for a manufacturer toterminate or not renew a franchise unless ""good cause'' exists. It is generally difficult for a manufacturer toterminate, or not renew, a franchise under these franchise laws, which were designed to protect dealers. Inaddition, in the Company's experience and historically in the automotive retail industry, dealership franchiseagreements are rarely involuntarily terminated or not renewed by the manufacturer. Accordingly, theCompany believes that its franchise agreements will contribute to cash flows for the foreseeable future andhave indefinite lives.

The Company has completed impairment tests as of June 30, 2005 and 2004 for goodwill and intangibleswith indefinite lives. The goodwill test includes determining the fair value of the Company's single reportingunit and comparing it to the carrying value of the net assets allocated to the reporting unit. The test forintangibles with indefinite lives requires the comparisons of estimated fair value to its carrying value by store.No impairment charges resulted from the required impairment tests. Goodwill and intangibles with indefinitelives will be tested for impairment annually at June 30 or more frequently when events or circumstancesindicate that an impairment may have occurred.

Other Assets

Other assets consist of various items, net of applicable amortization, including, among other items,service loaner and rental vehicle inventory, net, which is not available for sale, property held for sale, notesreceivable, restricted assets and debt issuance costs. Debt issuance costs are amortized to Other InterestExpense using the effective interest method through maturity.

At December 31, 2005 and 2004, the Company had $22.0 million and $31.1 million, respectively, ofproperty held for sale.

In 2003, the Company recognized a $27.5 million real estate impairment charge to write-down to fairvalue three underperforming franchised new vehicle stores. Of the charge, $10.4 million was included in OtherLosses related to a store currently operating in a converted used vehicle megastore. The remainder of thecharge, $17.1 million (or $10.5 million, net of taxes), was included in Loss from Discontinued Operations inthe 2003 Consolidated Income Statement related to two stores that operated in converted used vehiclemegastores which have been since closed.

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Other Current Liabilities

Other Current Liabilities consist of various items payable within one year including, among other items,accruals for payroll and benefits, sales taxes, finance and insurance chargeback liabilities, deferred revenue,accrued expenses, and customer deposits. Other Current Liabilities also includes other tax accruals, totaling$54.5 million and $181.3 million at December 31, 2005 and 2004, respectively. See Note 11, Income Taxes, ofNotes to Consolidated Financial Statements for additional discussion of income taxes.

Stock Options

The Company applies Accounting Principles Board Opinion No. 25, ""Accounting for Stock Issued toEmployees'' in accounting for stock-based employee compensation arrangements whereby compensation costrelated to stock options is generally not recognized in determining net income. Had compensation cost for theCompany's stock option plans been determined pursuant to Statement of Financial Accounting StandardsNo. 123, ""Accounting for Stock Based Compensation,'' the Company's net income and earnings per sharewould have decreased accordingly. Using the Black-Scholes option pricing model for all options granted, theCompany's pro forma net income, pro forma earnings per share and pro forma weighted average fair value ofoptions granted, with related assumptions, are as follows for the years ended December 31:

2005 2004 2003

Net income, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 496.5 $ 433.6 $ 479.2

Pro forma stock-based employee compensation cost, net of taxesÏÏ (10.4) (11.8) (17.4)

Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 486.1 $ 421.8 $ 461.8

Basic earnings per share, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.89 $ 1.63 $ 1.71

Pro forma stock-based employee compensation costÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (.04) $ (.04) $ (.06)

Pro forma basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.85 $ 1.58 $ 1.65

Diluted earnings per share, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.85 $ 1.59 $ 1.67

Pro forma stock-based employee compensation costÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (.04) $ (.04) $ (.06)

Pro forma diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.81 $ 1.55 $ 1.61

Pro forma weighted average fair value of options granted ÏÏÏÏÏÏÏÏ $ 7.74 $ 7.20 $ 6.51

Risk free interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.69-4.10% 3.12-3.93% 3.30-3.83%

Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Expected lives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 years 5 years 5 years

Expected volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33% 37% 40%

In December 2004, the Financial Accounting Standards Board (""FASB'') issued SFAS 123R, ""Share-Based Payment,'' a revision of SFAS 123. In March 2005, the SEC issued Staff Accounting Bulletin No. 107(SAB 107) regarding its interpretation of SFAS 123R. The standard requires companies to expense the grant-date fair value of stock options and other equity-based compensation issued to employees. In accordance withthe revised statement and related guidance, the Company will begin to recognize the expense attributable tostock options granted or vested subsequent to December 31, 2005 using the modified prospective method inthe first quarter of 2006. The Company will continue using the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period of the grant. The Companyexpects compensation expense during 2006 related to stock based awards consistent with the pro formadisclosures under SFAS 123 above for 2005.

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Derivative Financial Instruments

The Company's primary market risk exposure is increasing interest rates. Interest rate derivatives areused to hedge a portion of the Company's variable rate debt when appropriate based on market conditions.

The Company recognizes all derivative instruments on the balance sheet at fair value. The related gainsor losses on these transactions are deferred in stockholders' equity as a component of accumulated othercomprehensive income (loss). These deferred gains and losses are recognized in income or expense in theperiod in which the related items being hedged are recognized in expense. However, to the extent that thechange in value of a derivative contract does not perfectly offset the change in the value of the items beinghedged, that ineffective portion is immediately recognized in income. The Company recognizes gains or losseswhen the underlying transaction settles. All of the Company's interest rate hedges are designated as cash flowhedges. The Company has a series of interest rate hedge transactions, with a notional value of $800.0 million,consisting of a combination of swaps, and cap and floor options (collars). The hedge instruments are designedto convert certain floating rate vehicle floorplan payable and portions of the Company's mortgage facility tofixed rate debt. The Company has $200 million in swaps, which started in 2004 and effectively lock in a rate of3.0%, and $600 million in collars that cap floating rates to a maximum LIBOR-based rate no greater than2.4%. All of its hedge instruments mature between February 2006 and July 2006. At December 31, 2005 and2004, net unrealized losses, net of income taxes, related to hedges included in Accumulated OtherComprehensive Income (Loss) were $2.1 million and $(1.5) million, respectively. For the years endedDecember 31, 2005, 2004 and 2003, the income statement impact from interest rate hedges was an additionalincome (expense) of $.2 million, $(2.9) million, and $(.6) million, respectively. At December 31, 2005 and2004, all of the Company's derivative contracts were determined to be highly effective, and no ineffectiveportion was recognized in income.

Revenue Recognition

Revenue consists of sales of new and used vehicles and related finance and insurance (""F&I'') products,sales of parts and services and sales of other products. As further described below, the Company recognizesrevenue in the period in which products are sold or services are provided. The Company recognizes vehicle andfinance and insurance revenue when a sales contract has been executed, the vehicle has been delivered andpayment has been received or financing has been arranged. Revenue on finance and insurance productsrepresents commissions earned by the Company for: (i) loans and leases placed with financial institutions inconnection with customer vehicle purchases financed and (ii) vehicle protection products sold. Rebates,holdbacks, floorplan assistance and certain other dealer credits received directly from manufacturers arerecorded as a reduction of the cost of the vehicle and recognized into income upon the sale of the vehicle orwhen earned under a specific manufacturer program, whichever is later.

The Company sells and receives a commission, which is recognized upon sale, on the following types ofinsurance products: extended warranties, guaranteed auto protection (""GAP,'' which covers the shortfallbetween loan balance and insurance payoff), credit insurance, lease ""wear and tear'' insurance and theftprotection products. The Company may also participate in future profit, pursuant to retrospective commissionarrangements, that would be recognized over the life of the policies. Certain commissions earned from thesales of insurance products are subject to chargebacks should the contracts be terminated prior to theirexpirations. An estimated liability for chargebacks against revenue recognized from sales of F&I products isrecorded in the period in which the related revenue is recognized. Chargeback liabilities were $67.7 millionand $65.8 million at December 31, 2005 and 2004, respectively.

Through 2002, the Company reinsured through its captive insurance subsidiaries a portion of theunderwriting risk related to extended warranty and credit insurance products sold and administered by certainindependent third parties. Revenue and related direct costs from these reinsurance transactions were deferred

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and recognized over the life of the policies. Since January 1, 2003, the Company has not reinsured any newextended warranty or credit insurance products.

For installment loans and leases that in the past had been underwritten by the Company and notsecuritized, revenue from retail financing and certain loan underwriting costs were recognized over the term ofthe contract using the interest method. As of December 2001, the Company had exited the auto loan and leaseunderwriting business, and in July 2003, sold all of its finance receivables portfolio.

Advertising

The Company expenses the cost of advertising as incurred or when such advertising initially takes place,net of earned manufacturer credits and other discounts. Manufacturer advertising credits are earned inaccordance with the respective manufacturers' program, which is typically after the Company has incurred thecorresponding advertising expenses. Advertising expense, net of allowances was $214.0 million, $210.1 millionand $174.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. Advertisingallowances from manufacturers were $46.1 million, $51.5 million and $54.0 million for the years endedDecember 31, 2005, 2004 and 2003, respectively.

Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. Deferred income taxeshave been provided to show the effect of temporary differences between the recognition of revenue andexpenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities andtheir reported amounts in the financial statements.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted averagenumber of common shares outstanding during the year. Diluted earnings (loss) per share is based on thecombined weighted average number of common shares and common share equivalents outstanding whichinclude, where appropriate, the assumed exercise or conversion of options. In computing diluted earnings(loss) per share, the Company has utilized the treasury stock method.

2. RECEIVABLES, NET

The components of receivables, net of allowance for doubtful accounts, at December 31 are as follows:

2005 2004

Trade receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 96.5 $ 98.6

Manufacturer receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 177.7 174.4

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98.0 80.0

372.2 353.0

Less: Allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7.0) (6.6)

365.2 346.4

Contracts-in-transit and vehicle receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 430.5 370.5

Income taxes refundable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43.1

Receivables, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $795.7 $760.0

Contracts-in-transit and vehicle receivables represent receivables from financial institutions for theportion of the vehicle sales price financed by the Company's customers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

3. INVENTORY AND VEHICLE FLOORPLAN PAYABLE

The components of inventory at December 31 are as follows:

2005 2004

New vehicles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,201.0 $2,142.5

Used vehicles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 329.3 290.2

Parts, accessories and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152.4 143.3

$2,682.7 $2,576.0

At December 31, 2005 and 2004, vehicle floorplan payable-trade totaled $2.4 billion for both years.Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific vehicleinventories with manufacturers' captive finance subsidiaries. Vehicle floorplan payable-non-trade totaled$104.0 million and $80.0 million, at December 31, 2005 and 2004, respectively, and represents amountsborrowed to finance the purchase of specific vehicle inventories with non-trade lenders. Changes in vehiclefloorplan payable-trade are reported as operating cash flows and changes in vehicle floorplan-non-trade arereported as financing cash flows in the accompanying Consolidated Statements of Cash Flows.

All the Company's floorplan facilities are at LIBOR-based rates of interest (4.8% and 3.0% weightedaverage for 2005 and 2004, respectively). Secured floorplan facilities are used to finance new vehicleinventories and the amounts outstanding thereunder are due on demand, but are generally paid within severalbusiness days after the related vehicles are sold. Floorplan facilities are primarily collateralized by new vehicleinventories and related receivables. The Company's manufacturer agreements generally require that themanufacturer have the ability to draft against the floorplan facilities so that the lender directly funds themanufacturer for the purchase of inventory. The floorplan facilities contain certain financial and operationalcovenants. At December 31, 2005, the Company was in compliance with such covenants in all materialrespects. At December 31, 2005, aggregate capacity under the floorplan credit facilities to finance newvehicles was approximately $3.9 billion, of which $2.5 billion total was outstanding.

4. PROPERTY AND EQUIPMENT, NET

A summary of property and equipment, net, at December 31 is as follows:

2005 2004

Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 755.5 $ 693.4

Buildings and improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,111.9 1,106.9

Furniture, fixtures and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 438.6 402.0

2,306.0 2,202.3

Less: accumulated depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (473.7) (406.1)

$1,832.3 $1,796.2

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

5. INTANGIBLE ASSETS, NET

Intangible assets, net, at December 31 consist of the following:

2005 2004

Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,994.9 $2,986.7

Franchise rights Ì indefinite-livedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 224.4 220.5

Other intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.2 11.6

3,225.5 3,218.8

Less: accumulated amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (268.4) (272.1)

$2,957.1 $2,946.7

Goodwill and franchise rights-indefinite-lived are not amortized. Goodwill was amortized until January 1,2002 when the Company adopted provisions of SFAS 142, ""Goodwill and Other Intangible Assets.'' Otherintangibles with definite lives are amortized primarily over three to sixteen years using a straight-line method.

6. INSURANCE

Under self-insurance programs, the Company retains various levels of aggregate loss limits, per claimdeductibles and claims handling expenses as part of its various insurance programs, including property andcasualty and employee medical benefits. Costs in excess of this retained risk per claim may be insured undervarious contracts with third party insurance carriers. The ultimate costs of these retained insurance risks areestimated by management and by actuarial evaluation based on historical claims experience, adjusted forcurrent trends and changes in claims-handling procedures.

At December 31, 2005 and 2004 current insurance accruals were included in Other Current Liabilities inthe Consolidated Balance Sheets and long-term insurance accruals were included in Other Liabilities in theConsolidated Balance Sheets as follows:

2005 2004

Insurance accruals Ì current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $43.2 $29.3

Insurance accruals Ì long-term portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44.4 38.9

Total insurance accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $87.6 $68.2

7. NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt at December 31 are as follows:

2005 2004

9% senior unsecured notes, net of unamortized discount of $1.8 million and$3.4 million, respectivelyÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $321.7 $443.2

Revolving credit facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì

Mortgage facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 153.7 318.1

Other debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.6 51.3

525.0 812.6

Less: current maturitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40.6) (14.9)

$484.4 $797.7

55

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The Company has 9.0% senior unsecured notes outstanding due August 1, 2008. During 2005 and 2004,the Company repurchased $123.1 million and $3.4 million (face value) of senior unsecured notes at anaverage price of 110.5% and 114.3% of face value or $136.0 million and $3.9 million, respectively. The$12.9 million and the $.5 million in premium the Company paid for this repurchase plus related deferred costsof $4.5 million and $.1 million, respectively, were recognized as Other Interest Expense in the accompanying2005 and 2004 Consolidated Income Statements. The senior unsecured notes are guaranteed by substantiallyall of the Company's subsidiaries.

Through July 14, 2005, the Company had two revolving credit facilities with an aggregate borrowingcapacity of $500.0 million. A 364-day revolving credit facility, which was scheduled to expire in August 2005,provided borrowing capacity up to $200.0 million at LIBOR-plus 125 basis points. A five-year facility, whichwas scheduled to expire in August 2006, provided borrowing capacity up to $300.0 million at LIBOR plus225 basis points. There were no borrowings on these revolving credit facilities during 2005 and 2004. OnJuly 14, 2005, the Company terminated the credit facilities and entered into a new five-year revolving creditfacility with an aggregate borrowing capacity of $600.0 million presently at a rate of interest of LIBOR plus75 basis points. The credit spread charged for the revolving credit facility is impacted by the Company's seniorunsecured credit ratings. The facility is guaranteed by substantially all of the Company's subsidiaries. TheCompany has negotiated a letter of credit sublimit as part of its revolving credit facility. The amount availableto be borrowed under the revolving credit facility is reduced on a dollar-for-dollar basis by the cumulativeamount of any outstanding letters of credit, which totaled $87.6 million at December 31, 2005.

During 2005, the Company repaid $164.4 million of the outstanding balance under mortgage facilitieswith certain automotive manufacturers' captive finance subsidiaries, which includes prepayments totaling$154.0 million. At December 31, 2005, the Company had $153.7 million outstanding under a mortgage facilitywith various maturities through 2008. The facility bears interest at LIBOR-based interest rates (5.2% and3.5% weighted average for 2005 and 2004, respectively) and is secured by mortgages on certain of theCompany's store properties.

The Company's senior unsecured notes, revolving credit facility and mortgage facility contain numerouscustomary financial and operating covenants that place significant restrictions on the Company, including theCompany's ability to incur additional indebtedness or repay existing indebtedness, to create liens or otherencumbrances, to sell (or otherwise dispose of) assets and merge or consolidate with other entities. Theindenture for the Company's senior unsecured notes places significant restrictions on the Company's ability tomake certain payments (including dividends and share repurchases) and investments. The revolving creditfacility also requires the Company to meet certain financial ratios including financial covenants requiring themaintenance of a maximum consolidated cash flow leverage ratio and a maximum capitalization ratio. Inaddition, the senior unsecured notes contain a minimum fixed charge coverage ratio covenant, and themortgage facility contains both maximum cash flow leverage ratio and minimum interest coverage ratiocovenants. In the event that the Company were to default in the observance or performance of any of thefinancial covenants in the revolving credit facility or mortgage facilities and such default were to continuebeyond any cure period or waiver, the lender under the respective facility could elect to terminate the facilityand declare all outstanding obligations under such facility immediately payable. Under the senior unsecurednotes, should the Company be in violation of the financial covenants, it could be limited in incurring certainadditional indebtedness. The Company's revolving credit facility, the indenture for the Company's seniorunsecured notes, vehicle floorplan payable facilities and mortgage facilities have cross-default provisions thattrigger a default in the event of an uncured default under other material indebtedness of the Company. AtDecember 31, 2005, the Company was in compliance with the requirements of all such financial covenants.

In the event of a downgrade in the Company's credit ratings, none of the covenants described above would beimpacted. In addition, availability under the revolving credit facility described above would not be impacted should

56

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

a downgrade in the senior unsecured debt credit ratings occur. Certain covenants in the senior unsecured noteindenture would be eliminated with certain upgrades of our senior unsecured notes to investment grade.

Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the parent company) has noindependent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint andseveral, and any subsidiaries other than the guarantor subsidiaries are minor.

During 2000, the Company entered into a sale-leaseback transaction involving its corporate headquartersfacility that resulted in net proceeds of approximately $52.1 million. This transaction was accounted for as afinancing, wherein the property remains on the books and continues to be depreciated. The Company has theoption to renew the lease at the end of the ten-year lease term subject to certain conditions. The gain on thistransaction has been deferred and will be recognized at the end of the lease term, including renewals. AtDecember 31, 2005 and 2004, the remaining obligation related to this transaction of $44.9 million and$46.6 million, respectively, is included in Other Debt in the above table.

At December 31, 2005, aggregate maturities of notes payable and long-term debt, excluding vehiclefloorplan payable, were as follows:

Year Ending December 31:

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40.6

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.0

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412.8

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.9

2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36.7

$525.0

8. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is involved, and will continue to be involved, in numerous legal proceedings arising out ofthe conduct of its business, including litigation with customers, employment related lawsuits, class actions,purported class actions and actions brought by governmental authorities.

Many of the Company's Texas store subsidiaries have been named in three class action lawsuits broughtagainst the Texas Automobile Dealers Association (""TADA'') and approximately 700 new vehicle stores inTexas that are members of the TADA. The three actions allege that since January 1994, Texas dealers havedeceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well.In April 2002, in two actions (which have been consolidated), the state court certified two classes ofconsumers on whose behalf the action would proceed. In the federal antitrust case, in March 2003, the federalcourt conditionally certified a class of consumers. The Company and other defendants appealed the ruling tothe Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class certification order, andremanded the case back to the federal district court for further proceedings. In February 2005, the Companyand the plaintiffs in each of the cases agreed to settlement terms. The state settlement, which was approvedpreliminarily by the state court on December 27, 2005, is contingent upon final court approval, the hearing forwhich is currently scheduled for June 2006. The claims against the Company in federal court also would besettled contingent upon final approval in the state action. The estimated expense of the settlements is not amaterial amount and includes the Company's stores issuing coupons for discounts off future vehicle purchases,refunding cash in certain circumstances, and paying attorneys' fees and certain costs. Under the terms of thesettlements, the Company's stores would be permitted to continue to itemize and pass through to the customerthe cost of the inventory tax. If the settlements are not finally approved, the Company would then vigorously

57

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

assert available defenses in connection with the TADA lawsuits. Further, the Company may have certainrights of indemnification with respect to certain aspects of these lawsuits. However, an adverse resolution ofthe TADA lawsuits could result in the payment of significant costs and damages and negatively impact theCompany's ability to itemize and pass through to the customer the cost of the tax in the future, which couldhave a material adverse effect on the Company's business, results of operations, financial condition, cash flowsand prospects.

In addition to the foregoing cases, the Company is also a party to numerous other legal proceedings thatarose in the conduct of its business. The Company does not believe that the ultimate resolution of thesematters will have a material adverse effect on its results of operations, financial condition or cash flows.However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of oneor more of these matters could have a material adverse effect on its financial condition, results of operationsand cash flows.

Lease Commitments

The Company leases real property, equipment and software under various operating leases most of whichhave terms from one to twenty years.

Expenses under real property, equipment and software leases were $64.0 million, $60.8 million and$71.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. The leases require paymentof real estate taxes, insurance and common area maintenance in addition to rent. Most of the leases containrenewal options and escalation clauses.

Future minimum lease obligations under non-cancelable real property, equipment and software leaseswith initial terms in excess of one year at December 31, 2005 are as follows:

Year Ending December 31:

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 61.6

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53.3

2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.4

2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 41.5

2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.4

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 246.2

487.4

Less: sublease rentals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16.9)

$470.5

In September 2005, the EITF reached a consensus on issue EITF 05-06, ""Determining the AmortizationPeriod for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combina-tion.'' EITF 05-06 requires that leasehold improvements that are placed in service significantly after and notcontemplated at or near the beginning of the lease term or that are acquired in the business combinationshould be amortized over the shorter of the useful life of the assets or a term that includes the required leaseperiods and renewals that are deemed to be reasonable assured as of the date the leasehold improvements arepurchased or the date of acquisition, as applicable. EITF 05-06 is effective the first reporting period beginningafter June 29, 2005. The adoption of EITF 05-06 did not have a material impact on the Company'sconsolidated financial statements.

In October 2005, the FASB issued FASB Staff Position (""FSP'') No. FAS 13-1, ""Accounting for RentalCosts Incurred during a Construction Period.'' FSP No. FAS 13-1 requires rental costs associated with

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

operating leases that are incurred during a construction period to be recognized as rental expense. FSPNo. FAS 13-1 is effective for reporting periods beginning after December 15, 2005 and is not expected to havea material impact on the Company's consolidated financial statements.

Other Matters

The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide forthe use by the Company's subsidiaries of their respective dealership premises. Pursuant to these leases, theCompany's subsidiaries generally agree to indemnify the lessor and other related parties from certain liabilitiesarising as a result of the use of the leased premises, including environmental liabilities, or a breach of the leaseby the lessee. Additionally, from time to time, the Company enters into agreements with third parties inconnection with the sale of assets or businesses in which it agrees to indemnify the purchaser or related partiesfrom certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course ofbusiness in connection with purchases or sales of goods and services, the Company enters into agreements thatmay contain indemnification provisions. In the event that an indemnification claim is asserted, liability wouldbe limited by the terms of the applicable agreement.

From time to time, primarily in connection with dispositions of automotive stores, the Company'ssubsidiaries assign or sublet to the dealership purchaser the subsidiaries' interests in any real property leasesassociated with such stores. In general, the Company's subsidiaries retain responsibility for the performance ofcertain obligations under such leases to the extent that the assignee or sublessee does not perform, whethersuch performance is required prior to or following the assignment or subletting of the lease. Additionally, theCompany and its subsidiaries generally remain subject to the terms of any guarantees made by the Companyand its subsidiaries in connection with such leases. Although the Company generally has indemnificationrights against the assignee or sublessee in the event of non-performance under these leases, as well as certaindefenses, and the Company presently has no reason to believe that it or its subsidiaries will be called on toperform under any such assigned leases or subleases, the Company estimates that lessee rental paymentobligations during the remaining terms of these leases are approximately $70 million at December 31, 2005.The Company and its subsidiaries also may be called on to perform other obligations under these leases, suchas environmental remediation of the leased premises or repair of the leased premises upon termination of thelease, although the Company presently has no reason to believe that it or its subsidiaries will be called on to soperform and such obligations cannot be quantified at this time. The Company's exposure under these leases isdifficult to estimate and there can be no assurance that any performance of the Company or its subsidiariesrequired under these leases would not have a material adverse effect on the Company's business, financialcondition and cash flows.

At December 31, 2005, surety bonds, letters of credit and cash deposits totaled $120.3 million, including$87.6 million of letters of credit. In the ordinary course of business, the Company is required to postperformance and surety bonds, letter of credit, and/or cash deposits as financial guarantees of the Company'sperformance. The Company does not currently provide cash collateral for outstanding letters of credit.

In the ordinary course of business, the Company is subject to numerous laws and regulations, includingautomotive, environmental, health and safety and other laws and regulations. The Company does notanticipate that the costs of such compliance will have a material adverse effect on its business, consolidatedresults of operations, cash flows or financial condition, although such outcome is possible given the nature ofthe Company's operations and the extensive legal and regulatory framework applicable to its business. TheCompany does not have any material known environmental commitments or contingencies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

9. SHAREHOLDERS' EQUITY

A summary of yearly repurchase activity follows:

AggregateYear Ended December 31: Shares Repurchased Purchase Price

2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.8 $237.1

2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.1 $236.8

2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39.2 $575.2

As of December 31, 2005, the Company has $71.3 million available for share repurchases under therepurchase program authorized by the Company's Board of Directors. Future share repurchases are subject tolimitations contained in the indenture relating to the Company's senior unsecured notes.

In 2004 and 2003, the Company's Board of Directors authorized the retirement of 20 million and50 million treasury shares, respectively, which assumed the status of authorized but unissued shares. This hadthe effect of reducing treasury stock and issued common stock, which includes treasury stock. The Company'soutstanding common stock, net of treasury stock, was not impacted by the treasury share retirements. TheCompany's common stock, additional paid-in capital and treasury stock accounts have been adjustedaccordingly. There was no impact to shareholders' equity.

The Company has 5.0 million authorized shares of preferred stock, par value $.01 per share, none ofwhich are issued or outstanding. The Board of Directors has the authority to issue the preferred stock in one ormore series and to establish the rights, preferences and dividends.

During 2005, 2004 and 2003, proceeds from the exercise of stock options were $112.8 million,$94.2 million and $118.1 million, respectively.

10. STOCK OPTIONS

The Company has various stock option plans under which options to purchase shares of common stockmay be granted to key employees and directors of the Company. Options granted under the plans are non-qualified and are granted at a price equal to or above the closing market price of the common stock on thetrading day immediately prior to the date of grant. Generally, options granted will have a term of 10 years fromthe date of grant, and will vest in increments of 25% per year over a four-year period on the yearly anniversaryof the grant date. A summary of stock option transactions is as follows for the years ended December 31:

2005 2004 2003

Weighted- Weighted- Weighted- Average Average AverageExercise Exercise Exercise

Shares Price Shares Price Shares Price

Options outstanding at beginning of year ÏÏÏÏ 36.0 $14.68 42.9 $13.71 53.5 $12.85

GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.6 $21.40 2.8 $16.87 3.2 $16.49

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9.8) $11.55 (8.7) $10.88 (10.9) $10.82

CanceledÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.8) $15.36 (1.0) $12.99 (2.9) $11.71

Options outstanding at end of year ÏÏÏÏÏÏÏÏÏ 28.0 $16.39 36.0 $14.68 42.9 13.71

Options exercisable at end of yearÏÏÏÏÏÏÏÏÏÏ 22.0 $15.91 28.5 $14.64 32.5 $14.14

Options available for future grants ÏÏÏÏÏÏÏÏÏ 15.7 18.5 20.2

60

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following table summarizes information about outstanding and exercisable stock options atDecember 31, 2005:

Outstanding

Weighted- ExercisableAverage Weighted-

Weighted-AverageRemaining AverageExerciseContractual Exercise

Exercise Price or Range of Exercise Prices Shares Life (Yrs.) Price Shares Price

$ 3.78 - $ 5.66 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .1 1.0 $ 4.14 .1 $ 4.14

$ 5.67 - $ 7.56 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.9 3.7 $ 6.87 1.9 $ 6.87

$ 7.57 - $11.34 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.0 4.6 $10.96 2.9 $10.96

$11.35 - $15.12 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.4 3.3 $13.17 8.6 $13.26

$15.13 - $18.90 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.4 7.7 $16.91 1.7 $16.98

$18.91 - $22.68 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.9 5.6 $20.83 2.5 $20.15

$22.69 - $34.02 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.3 .9 $25.82 4.3 $25.82

28.0 $16.39 22.0 $15.91

11. INCOME TAXES

The components of the provision for income taxes from continuing operations for the years endedDecember 31 are as follows:

2005 2004 2003

Current:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $179.9 $149.6 $ 125.0

State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31.6 23.6 13.7

Federal and state deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.4 63.3 95.0

Change in valuation allowance, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.1 .5 8.3

Adjustments and settlements, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16.6) (26.3) (149.2)

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $227.4 $210.7 $ 92.8

A reconciliation of the provision for income taxes calculated using the statutory federal income tax rate tothe Company's provision for income taxes from continuing operations for the years ended December 31 is asfollows:

2005 % 2004 % 2003 %

Provision for income taxes at statutory rateof 35% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $218.0 35.0 $212.7 35.0 $ 214.0 35.0

Non-deductible expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.3 .4 2.1 .3 1.6 .3

State income taxes, net of federalbenefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21.6 3.5 21.7 3.6 18.7 3.1

241.9 38.9 236.5 38.9 234.3 38.4

Change in valuation allowance, net ÏÏÏÏÏÏÏ 2.1 .3 .5 .1 8.3 1.4

Adjustments and settlements, net ÏÏÏÏÏÏÏÏ (16.6) (2.7) (26.3) (4.3) (149.2) (24.4)

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (.6) (.2)

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $227.4 36.5 $210.7 34.7 $ 92.8 15.2

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Deferred income tax asset and liability components at December 31 are as follows:

2005 2004

Deferred income tax assets:

InventoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (8.9) $ (6.2)

Receivables reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5.4) (5.5)

Warranty, chargeback and self-insurance liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (57.1) (37.6)

Other accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (28.3) (35.9)

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22.6) (42.6)

Loss carryforwards Ì Federal & State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (20.2) (19.2)

(142.5) (147.0)

Valuation allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.8 15.6

Deferred income tax liabilities:

Long-lived assets (intangibles and property) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 232.4 197.1

Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.1 7.1

237.5 204.2

Net deferred income tax (assets) liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 109.8 $ 72.8

At December 31, 2005 and 2004, net current deferred income tax assets of $76.4 million and$83.8 million, respectively, are classified as Other Current Assets in the accompanying Consolidated BalanceSheet.

At December 31, 2005, the Company had available gross domestic state net operating loss carryforwardsand capital loss carryforwards totaling approximately $520 million (representing a deferred tax asset of$20.2 million), which expire from 2006 through 2026. At December 31, 2005, the Company had $14.8 millionof valuation allowance related to these loss carryforwards. In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion or all of the deferred tax assets willnot be realized. The Company provides valuation allowances to offset portions of deferred tax assets due touncertainty surrounding the future realization of such deferred tax assets. The Company adjusts the valuationallowance in the period management determines it is more likely than not that deferred tax assets will or willnot be realized. Certain decreases to valuation allowances are offset against intangible assets associated withbusiness acquisitions accounted for under the purchase method of accounting.

In March 2003, the Company entered into a settlement agreement with the IRS with respect to the taxtreatment of certain transactions the Company entered into in 1997 and 1999. Under the agreement, theCompany agreed to pay the IRS net aggregate payments of approximately $470 million, which included aninitial net payment of approximately $350 million due in March 2004 and three subsequent net payments ofapproximately $40 million each due March 2005, 2006, and 2007, respectively. As a result of the settlement,the Company recognized an income tax benefit of $127.5 million from the reduction of previously recorded taxliabilities.

In 2003, the Company made a $366 million prepayment of the initial installment due March 2004,including interest. In 2004, the Company paid the remaining balance due related to the IRS settlementtotaling $128.9 million, including accrued interest. The Company recorded interest expense on the IRS taxsettlement payables totaling $4.8 million and $12.1 million for the years ended December 31, 2004 and 2003,respectively.

62

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

During 2005, 2004 and 2003, the Company recorded net benefits to the provision for income taxestotaling $14.5 million, $25.8 million and $140.9 million (which includes $127.5 million recognized as a resultof an IRS settlement discussed above), respectively, primarily related to the resolution of various income taxmatters. The Company also recognized a $110.0 million and $52.2 million gain included in DiscontinuedOperations in 2005 and 2004, respectively, related to the settlement of various income tax matters. TheCompany completed the federal income tax audit for the years 1997 though 2001 and a federal income taxaudit for 2002 through 2004 is being conducted by the IRS. In addition, the Company is routinely audited bythe states in which it does business and remains under examination by various states for the tax yearsdiscussed above. The Company could experience additional state and federal tax adjustments over the nexteighteen months as it continues to work through various tax matters.

As a matter of course, the Company is regularly audited by various taxing authorities. From time to time,these audits result in proposed assessments where the ultimate resolution may result in the Company owingadditional taxes. The Company believes that its tax positions comply with applicable tax law and that it hasadequately provided for these matters. Included in Other Current Liabilities at December 31, 2005 and 2004are $54.5 million and $181.3 million, respectively, provided by the Company for these matters.

12. EARNINGS PER SHARE

The computation of weighted average common and common equivalent shares used in the calculation ofbasic and diluted earnings per share is as follows for the years ended December 31:

2005 2004 2003

Weighted average shares outstanding used in calculating basic earningsper share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 262.7 266.7 279.5

Effect of dilutive options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.3 5.8 7.5

Weighted average common and common equivalent shares used incalculating diluted earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 268.0 272.5 287.0

As of December 31, 2005 the Company had employee stock options outstanding of 28.0 million of which7.2 million have been excluded from the computation of diluted earnings per share since they are anti-dilutive.As of December 31, 2004 and 2003, outstanding employee stock options totaling 9.3 million and 6.6 million,respectively, have been excluded since they were anti-dilutive.

13. DISCONTINUED OPERATIONS

Discontinued operations are related to stores that were sold or for which the Company has entered into adefinitive sale agreement. Generally, the sale of a store is completed within 60 to 90 days after the date of adefinitive sale agreement. The accompanying Consolidated Financial Statements for all the periods presentedhave been adjusted to classify these stores as discontinued operations. Also included in results fromdiscontinued operations is a gain from an income tax adjustment related to items previously reported in

63

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

discontinued operations. Selected income statement data for the Company's discontinued operations is asfollows:

2005 2004 2003

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $214.6 $689.5 $829.1

Pre-tax loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(11.8) $(11.3) $ (3.4)

Pre-tax loss on disposal from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏ (6.3) (7.5) (17.1)

(18.1) (18.8) (20.5)

Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (9.1) (3.1) (7.9)

(9.0) (15.7) (12.6)

Income tax adjustment (see Note 11)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 110.0 52.2 Ì

Loss from discontinued operations, net income taxes, related toANC Rental (see below) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (12.3)

Income (loss) from discontinued operations, net of income taxes ÏÏÏ $101.0 $ 36.5 $(24.9)

A summary of the total assets and liabilities of discontinued operations included in Other Current Assetsand Other Current Liabilities is as follows:

December 31, December 31,2005 2004

Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11.4 $ 86.3

Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.8 16.0

Property and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.5 45.6

Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.5 38.6

Other non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .7 1.4

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $47.9 $187.9

Vehicle floorplan payable-tradeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9.8 $ 78.6

Vehicle floorplan payable-non-tradeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.2

Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.9 12.2

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13.7 $ 92.0

Responsibility for the Company's vehicle floorplan payable at the time of divestiture is assumed by thebuyer. Cash received from business divestitures is net of vehicle floorplan payable assumed by the buyer.

On June 30, 2000, the Company completed the tax-free spin-off of ANC Rental Corporation(""ANC Rental''), which operated its former rental business. In connection with the spin-off, the Companyagreed to provide certain guarantees on behalf of ANC Rental. In 2001, ANC Rental filed voluntary petitionsfor reorganization under Chapter 11 of the U.S. Bankruptcy Code. In 2003, the bankruptcy court approved asettlement agreement among AutoNation, ANC Rental and the Committee of Unsecured Creditors in thebankruptcy.

Pursuant to the Settlement Agreement, the Company continued to guarantee $29.5 million, andcommitted guarantee up to an additional $10.5 million, in surety bonds supporting obligations of the rentalbusiness until December 2006. In 2004, the Company was released from its $29.5 million guarantee obligationand its remaining $10.5 million surety bond guarantee obligation. This triggered an obligation under theSettlement Agreement for the Company to pay $20 million (one-half of the permanent reduction of the suretybond guarantee obligation), to a trust established for the benefit of the unsecured creditors in the bankruptcy,

64

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

which payment was made in 2004. The Company had previously incurred a pre-tax charge of $20.0 million($12.3 million after-tax) for this liability, included in Loss from Discontinued Operations in the accompany-ing Unaudited Consolidated Income Statements during 2003.

14. OTHER COMPREHENSIVE INCOME (LOSS)

The changes in the components of other comprehensive income (loss), net of income taxes, are as followsfor the years ended December 31:

2005 2004 2003

Pre-Tax Tax Net Pre-Tax Tax Net Pre-Tax Tax NetAmount Effect Amount Amount Effect Amount Amount Effect Amount

Unrealized gains (losses) on cashflow hedges, restrictedinvestments, marketable securities,and interest-only strip receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5.0 $(1.7) $3.3 $2.6 $(.9) $1.7 $(12.0) $4.6 $(7.4)

The accumulated other comprehensive loss in the accompanying Consolidated Statements of Sharehold-ers' Equity and Comprehensive Income (Loss) of $1.8 million, $(1.5) million and $(3.2) million atDecember 31, 2005, 2004 and 2003, respectively, consists primarily of unrealized losses on cash flow hedges.

15. ACQUISITIONS

The Company acquired various automotive retail franchises and related assets during the years endedDecember 31, 2005, 2004 and 2003. The Company paid approximately $6.0 million, $194.6 million and$45.6 million, respectively, in cash during 2005, 2004 and 2003 for automotive retail acquisitions. TheCompany also paid $9.9 million, $3.3 million and $3.2 million during 2005, 2004 and 2003, respectively, indeferred purchase price for certain prior year automotive retail acquisitions. During 2005 and 2004, theCompany acquired two and eight automobile retail franchises and other related assets, respectively. AtDecember 31, 2005 and 2004, the Company had accrued approximately $1.0 million and $10.5 million,respectively, of deferred purchase price due to former owners of acquired businesses, which is included inOther Current Liabilities.

65

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Purchase price allocations for 2005 are tentative and subject to final adjustment due to their closing date.Purchase price allocations for business combinations accounted for under the purchase method of accountingrelated to continuing operations for the years ended December 31 were as follows:

2005 2004 2003

Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6.5 $ 51.5 $ 33.3

Property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .1 48.3 11.6

GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.5 55.2 13.3

Franchise rights Ì indefinite lived ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.9 78.1 22.7

Other intangibles subject to amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì .4 Ì

Working capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (.5) (2.1) (4.1)

Vehicle floorplan payable-tradeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6.5) (33.6) (28.0)

Vehicle floorplan payable-non-trade ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (3.0) (2.7)

Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (.2) (.5)

6.0 194.6 45.6

Cash paid in deferred purchase price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.9 3.3 3.2

Cash used in business acquisitions, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏ $15.9 $197.9 $ 48.8

Responsibility for the vehicle floorplan payable is assumed by the Company in acquisition transactions.Typically, the Company refinances the vehicle floorplan payable in which case the initial refinancing isaccounted for as a vehicle floorplan payable-non-trade. The Company anticipates that all of the goodwillrecorded in 2005 and 2004 will be deductible for federal income tax purposes.

The Company's unaudited pro forma consolidated results of continuing operations assuming 2005 and2004 acquisitions had occurred at January 1, 2004 are as follows for the years ended December 31:

2005 2004

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,265.0 $19,236.8

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 496.9 $ 438.6

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.85 $ 1.61

The unaudited pro forma results of continuing operations are presented for informational purposes onlyand may not necessarily reflect the future results of operations of the Company or what the results ofoperations would have been had the Company owned and operated these businesses as of the beginning ofeach period presented.

In March 2006, the Company acquired a Mercedes-Benz dealership in Pompano Beach, Florida. TheCompany also signed a separate agreement in January 2006 to acquire certain rights to establish a newMercedes-Benz dealership in Palm Beach County, Florida.

16. RELATED PARTY TRANSACTIONS

The following is a summary of significant agreements and transactions among certain related parties andthe Company. It is the Company's policy that transactions with affiliated parties must be entered into in goodfaith on fair and reasonable terms that are no less favorable to the Company than those that would be availablein a comparable transaction in arm's-length dealings with an unrelated third party. Based on the Company'sexperience, it believes that all of the transactions described below met that standard at the time thetransactions were effected.

66

AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

In connection with the Company's spin-off of ANC Rental in June 2000, the Company entered intocertain agreements and arrangements with ANC Rental. J.P. Bryan, a Company Director, andH. Wayne Huizenga, a former Company Director, were directors of ANC Rental from July 2000 untilOctober 2003. ANC Rental agreed to buy automotive parts from the Company following the spin-off, andpaid the Company approximately $3.0 million for parts purchases made during 2003. See further informationin Note 13, Discontinued Operations.

17. CASH FLOW INFORMATION

The Company considers all highly liquid investments with purchased maturities of three months or less tobe cash equivalents unless the investments are legally or contractually restricted for more than three months.The effect of non-cash transactions is excluded from the accompanying Consolidated Statements of CashFlows.

The Company made interest payments of approximately $187.2 million, $152.4 million, and $132.4 mil-lion for the years ended December 31, 2005, 2004 and 2003, respectively, including interest on vehicleinventory financing. The Company made income tax payments of approximately $43.4 million, $253.4 millionand $471.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. The tax payments for2004 include prepayments of the IRS settlement totaling $128.9 million as further discussed in Note 11,Income Taxes, of Notes to Consolidated Financial Statements. In February 2006, the Company madeestimated state tax and federal tax payments totaling approximately $100 million, primarily related toprovisions for the third and fourth quarter of 2005.

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument represents the amount at which the instrument could beexchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair valueestimates are made at a specific point in time, based on relevant market information about the financialinstrument. These estimates are subjective in nature and involve uncertainties and matters of significantjudgment, and therefore cannot be determined with precision. The assumptions used have a significant effecton the estimated amounts reported.

The following methods and assumptions were used by the Company in estimating fair value disclosuresfor financial instruments:

‚ Cash and cash equivalents, trade and manufacturer receivables, other current assets, vehicle floorplanpayable, accounts payable, other current liabilities and variable rate debt: The amounts reported inthe accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature.

‚ Fixed rate debt: The fair value of fixed rate debt is based on borrowing rates currently available to theCompany for debt with similar terms and maturities. At December 31, 2005 and 2004, the carryingamounts of the Company's fixed rate debt primarily consisting of amounts outstanding under theCompany's senior unsecured notes, totaled $371.3 million and $494.5 million, respectively, with a fairvalue of $398.5 million and $561.5 million, respectively.

19. BUSINESS AND CREDIT CONCENTRATIONS

The Company owns and operates franchised automotive stores in the United States pursuant to franchiseagreements with vehicle manufacturers. Franchise agreements generally provide the manufacturers ordistributors with considerable influence over the operations of the store. The success of any franchisedautomotive dealership is dependent, to a large extent, on the financial condition, management, marketing,production and distribution capabilities of the vehicle manufacturers or distributors of which the Companyholds franchises. At December 31, 2005 and 2004, the Company had receivables from manufacturers or

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

distributors of $177.7 million and $174.4 million, respectively. Additionally, a large portion of the Company'sContracts-in-Transit included in Accounts Receivable are due from automotive manufacturers' captivefinance subsidiaries which provide financing directly to the Company's new and used vehicle customers.

The Company purchases substantially all of its new vehicles from various manufacturers or distributors atthe prevailing prices available to all franchised dealers. Additionally, the Company finances its new vehicleinventory primarily with automotive manufacturers' captive finance subsidiaries. The Company's sales volumecould be adversely impacted by the manufacturers' or distributors' inability to supply the stores with anadequate supply of vehicles and related financing.

Concentrations of credit risk with respect to non-manufacturer trade receivables are limited due to thewide variety of customers and markets in which the Company's products are sold as well as their dispersionacross many different geographic areas in the United States. Consequently, at December 31, 2005, theCompany does not consider itself to have any significant non-manufacturer concentrations of credit risk.

20. QUARTERLY INFORMATION (UNAUDITED)

The Company's operations generally experience higher volumes of vehicle sales and service in the secondand third quarters of each year in part due to consumer buying trends and the introduction of new vehiclemodels. Also, demand for cars and light trucks is generally lower during the winter months than in otherseasons, particularly in regions of the United States where stores may be subject to adverse winter weatherconditions. Accordingly, the Company expects revenue and operating results generally to be lower in the firstand fourth quarters as compared to the second and third quarters. However, revenue may be impactedsignificantly from quarter to quarter by actual or threatened severe weather events, and by other factorsunrelated to weather conditions, such as changing economic conditions and automotive manufacturerincentive programs.

The following is an analysis of certain items in the Consolidated Income Statements by quarter for 2005and 2004:

First Second Third FourthQuarter Quarter Quarter Quarter

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $4,561.2 $5,018.9 $5,188.0 $4,485.32004 $4,536.8 $4,816.0 $4,940.7 $4,751.1

Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $ 199.6 $ 209.7 $ 219.6 $ 178.12004 $ 182.0 $ 195.2 $ 195.2 $ 193.0

Income from continuing operations(2) ÏÏÏÏ 2005 $ 88.9 $ 106.0 $ 120.2 $ 80.42004 $ 88.6 $ 96.4 $ 95.7 $ 116.4

Net income(2)(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $ 97.0 $ 194.8 $ 129.4 $ 75.32004 $ 87.3 $ 92.1 $ 92.4 $ 161.8

Basic earnings per share from continuingoperations(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $ .34 $ .40 $ .46 $ .31

2004 $ .33 $ .36 $ .36 $ .44

Diluted earnings per share from continuingoperations(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 $ .33 $ .40 $ .45 $ .30

2004 $ .32 $ .35 $ .35 $ .43

(1) Quarterly basic and diluted earnings per share from continuing operations may not equal total earningsper share for the year as reported in the Consolidated Income Statements due to the effect of thecalculation of weighted average common stock equivalents on a quarterly basis.

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AUTONATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(2) Fourth quarter 2004 income from continuing operations and net income were impacted by a $24.6 millionbenefit from income tax adjustments.

(3) Second quarter 2005 net income was impacted by a $95.7 million gain included in discontinuedoperations related to the resolution of various income tax matters.

The following table sets forth, for the periods indicated, the high and low prices per share of theCompany's Common Stock as reported by the New York Stock Exchange:

High Low

2005

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22.84 $18.44

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $22.54 $19.57

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $21.69 $17.91

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20.05 $18.35

2004

Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19.33 $16.24

Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17.22 $15.15

Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17.69 $15.01

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18.37 $16.06

69

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

Controls and Procedures

We evaluated, under the supervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as ofthe end of the period covered by this Annual Report. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the endof the period covered by this Annual Report in timely alerting them as to material information relating toAutoNation (including our consolidated subsidiaries) required to be included in this Annual Report.

There was no change in our internal control over financial reporting during our last fiscal quarteridentified in connection with the evaluation referred to above that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting. However, we continue to centralizecertain key store-level accounting and administrative activities, which we expect will streamline our internalcontrol over financial reporting. The initial or ""core'' phase consists of implementing a standard dataprocessing platform in the store and centralizing to a shared services center certain key accounting processes(non-inventory accounts payable, bank account reconciliations and certain accounts receivable). We havesubstantially implemented the core phase in 106 of our 269 stores as of December 31, 2005.

In addition, we considered the restatement of our Consolidated Statements of Cash Flows for the yearsended December 31, 2004 and December 31, 2003 to comply with the guidance under Statement of FinancialAccounting Standards No. 95, ""Statement of Cash Flows,'' as disclosed in Note 1, Summary of SignificantAccounting Policies, of the Consolidated Financial Statements of this Form 10-K, and concluded that suchrestatement does not represent a material weakness in our internal control over financial reporting.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with theparticipation of our management, including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control over financial reporting based on theframework in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring Organiza-tions of the Treadway Commission. Based on our evaluation under the framework in Internal Control ÌIntegrated Framework, our management concluded that our internal control over financial reporting waseffective as of December 31, 2005. Our management's assessment of the effectiveness of our internal controlover financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registeredpublic accounting firm, as stated in their report which is included herein.

ITEM 9B. OTHER INFORMATION

None.

70

PART III

The information required by Item 10 (other than the information required by Item 401 of Regula-tion S-K with respect to our executive officers, which is set forth under Part I of this Annual Report onForm 10-K), Item 11, Item 12 (other than information required by Item 201(d) of Regulation S-K withrespect to equity compensation plans, which is set forth below), Item 13 and Item 14 of Part III of Form 10-Kwill be set forth in our Proxy Statement relating to the 2006 Annual Meeting of Stockholders and isincorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides certain information, as of December 31, 2005, relating to the equitycompensation plans under which options to acquire our common stock may be granted from time to time.

Number ofSecurities

Number of Weighted- Remaining AvailableSecurities to be Average Exercise for Future IssuanceIssued Upon Price of Under EquityExercise of Outstanding Compensation PlansOutstanding Options, (Excluding

Options, Warrants Warrants and Securities Reflectedand Rights Rights in Column (a))

Plan Category (a) (b) (c)

Equity Compensation Plans Approved by SecurityHolders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,968,912 $16.39 15,722,428

Equity Compensation Plans Not Approved bySecurity Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0 0 0

Total*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,968,912 $16.39 15,722,428

* Does not include options to purchase an aggregate of 24,432 shares, at a weighted-average exercise price of$14.68, granted under plans assumed in connection with acquisition transactions. We have not made, andwill not make in the future, any grants of options under these plans assumed in connection with acquisitiontransactions.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements of the Company are set forth in Part II, Item 8.(2) Exhibits Ì See Exhibit Index included elsewhere in this document.

71

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

REGISTRANT:

AutoNation, Inc.

By: /s/ MICHAEL J. JACKSON

Michael J. Jackson

Chairman of the Board and Chief Executive

Officer

March 2, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed belowby the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ MICHAEL J. JACKSON Chairman of the Board and Chief March 2, 2006Executive Officer (Principal ExecutiveMichael J. Jackson

Officer)

/s/ CRAIG T. MONAGHAN Executive Vice President and Chief March 2, 2006Financial Officer (Principal FinancialCraig T. Monaghan

Officer)

/s/ J. ALEXANDER MCALLISTER Vice President Ì Corporate Controller March 2, 2006(Principal Accounting Officer)J. Alexander McAllister

/s/ ROBERT J. BROWN Director March 2, 2006

Robert J. Brown

/s/ J.P. BRYAN Director March 2, 2006

J.P. Bryan

/s/ RICK L. BURDICK Director March 2, 2006

Rick L. Burdick

/s/ WILLIAM C. CROWLEY Director March 2, 2006

William C. Crowley

/s/ EDWARD S. LAMPERT Director March 2, 2006

Edward S. Lampert

/s/ MICHAEL E. MAROONE Director March 2, 2006

Michael E. Maroone

/s/ IRENE B. ROSENFELD Director March 2, 2006

Irene B. Rosenfeld

72

EXHIBIT INDEX

Exhibits Description of Exhibits

3.1 Third Amended and Restated Certificate of Incorporation of AutoNation, Inc. (incorporated byreference to Exhibit 3.1 to AutoNation's Quarterly Report on Form 10-Q for the quarter endedJune 30, 1999).

3.2 Amended and Restated Bylaws of AutoNation, Inc. (incorporated by reference to Exhibit 3.2 toAutoNation's Current Report on Form 8-K dated December 8, 2000).

4.1 Indenture, dated as of August 10, 2001 (the ""Indenture''), relating to the issuance of $450.0 millionaggregate principal amount of senior unsecured notes due 2008 (incorporated by reference toExhibit 4.4 to the Registration Statement on Form S-4 (SEC 333-71098) filed on October 5, 2001).

4.2 Supplemental Indenture, dated as of April 30, 2002, amending the Indenture to update the list of theCompany's subsidiaries as guarantors thereunder (incorporated by reference to Exhibit 4.2 toAutoNation's Annual Report on Form 10-K for the year ended December 31, 2003).

4.3 Supplemental Indenture, dated as of November 8, 2002 amending the Indenture to increase by$400.0 million the Company's capacity to make restricted payments under the terms of theIndenture, including payments for the repurchase of its common stock (incorporated by reference toExhibit 4.2 to AutoNation's Annual Report on Form 10-K for the year ended December 31, 2002).

4.4* Supplemental Indenture, dated as of March 29, 2004, amending the Indenture to update the list ofthe Company's subsidiaries as guarantors thereunder.

4.5* Supplemental Indenture, dated as of November 3, 2005, amending the Indenture to update the list ofthe Company's subsidiaries as guarantors thereunder.

4.6 Five Year Credit Agreement dated July 14, 2005 relating to a $600 million unsecured bank line ofcredit (incorporated by reference to Exhibit 10.15 of the AutoNation's Form 8-K filed on July 14,2005).

4.7 AutoNation is a party to certain long-term debt agreements where the amount involved does notexceed 10% of AutoNation's total assets. AutoNation agrees to furnish a copy of any suchagreements to the Commission upon request.

10.1 AutoNation, Inc. 1991 Stock Option Plan, as amended to date (incorporated by reference toExhibit 10.1 to AutoNation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).

10.2 AutoNation, Inc. 1995 Amended and Restated Employee Stock Option Plan, as amended to date(incorporated by reference to Exhibit 10.2 to AutoNation's Quarterly Report on Form 10-Q for thequarter ended June 30, 2000).

10.3 AutoNation Enterprises Incorporated Amended and Restated 1995 Employee Stock Option Plan, asamended to date (incorporated by reference to Exhibit 10.3 to AutoNation's Quarterly Report onForm 10-Q for the quarter ended June 30, 2000).

10.4 AutoNation, Inc. Amended and Restated 1995 Non-Employee Director Stock Option Plan (incor-porated by reference to Exhibit 10.10 to AutoNation's Annual Report on Form 10-K for the yearended December 31, 1998).

10.5 AutoNation, Inc. Amended and Restated 1997 Employee Stock Option Plan, as amended to date(incorporated by reference to Exhibit 10.4 to AutoNation's Quarterly Report on Form 10-Q for thequarter ended June 30, 2000).

10.6 AutoNation, Inc. Amended and Restated 1998 Employee Stock Option Plan, as amended to date(incorporated by reference to Exhibit 10.5 to AutoNation's Quarterly Report on Form 10-Q for thequarter ended June 30, 2000).

10.7 AutoNation, Inc. Senior Executive Incentive Bonus Plan (incorporated by reference to Exhibit A toAutoNation's Proxy Statement on Schedule 14A filed with the Commission on April 12, 2002).

10.8 AutoNation, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 toAutoNation's Form 8-K filed on November 23, 2005)

10.9 Employment Agreement dated December 30, 2004, between AutoNation, Inc. andMichael J. Jackson, Chairman and Chief Executive Officer (incorporated by reference toExhibit 10.1 of the Company's Form 8-K filed on January 3, 2005).

Exhibits Description of Exhibits

10.10 Amendment No. 1 dated March 25, 2005 to December 30, 2004 Employment Agreement withMichael J. Jackson (incorporated by reference to Exhibit 10.15 to the Company's Form 8-K filed onMarch 31, 2005).

10.11 Letter Agreement dated March 26, 1999 between AutoNation, Inc. and Michael E. Maroone,President and Chief Operating Officer (incorporated by reference to Exhibit 10.1 of AutoNation'sQuarterly Report on Form 10-Q for the quarter ended September 30, 1999).

10.12 Employment Agreement dated July 27, 2005, between AutoNation, Inc. and Michael E. Maroone,President and Chief Operating Officer (incorporated by reference to Exhibit 10.1 to AutoNation'sForm 8-K filed on July 27, 2005).

10.13 Letter Agreement dated April 18, 2000 between AutoNation, Inc. and Craig T. Monaghan, ChiefFinancial Officer (incorporated by reference to Exhibit 10.6 to AutoNation's Quarterly Report onForm 10-Q for the quarter ended June 30, 2000).

10.14 Form of Stock Option Agreement for stock options granted under the AutoNation, Inc. employeestock option plans (incorporated by reference to Exhibit 10.12 to AutoNation's Annual Report onForm 10-K for the year ended December 31, 2004).

10.15 Settlement and Release Agreement dated April 15, 2003 with ANC Rental Corporation and theUnsecured Creditors' Committee appointed in connection with ANC's bankruptcy (incorporated byreference to Exhibit 99.1 of the Company's Form 8-K filed on April 16, 2003).

21.1* Subsidiaries of AutoNation, Inc.

23.1* Consent of KPMG LLP

31.1* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2* Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1** Section 1350 Certification of Principal Executive Officer

32.2** Section 1350 Certification of Principal Financial Officer

* Filed herewith

** Furnished herewith

Exhibits 10.1 through 10.14 are management contracts or compensatory plans, contracts or arrangements.

EXHIBIT 31.1

CERTIFICATION

I, Michael J. Jackson, certify that:

1. I have reviewed this annual report on Form 10-K of AutoNation, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internalcontrol over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the endof the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reportingthat occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in thecase of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant's auditors and the audit committee of registrant'sboard of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant's ability to record,process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant's internal control over financial reporting.

/s/ Michael J. Jackson

Michael J. JacksonChairman and Chief Executive Officer

Date: March 2, 2006

EXHIBIT 31.2

CERTIFICATION

I, Craig T. Monaghan, certify that:

1. I have reviewed this annual report on Form 10-K of AutoNation, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in light of the circumstances under whichsuch statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internalcontrol over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the endof the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reportingthat occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in thecase of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant's auditors and the audit committee of registrant'sboard of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant's ability to record,process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant's internal control over financial reporting.

/s/ Craig T. Monaghan

Craig T. MonaghanExecutive Vice President and ChiefFinancial Officer

Date: March 2, 2006

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of AutoNation, Inc. (the ""Company'') for the yearended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof(the ""Report''), I, Michael J. Jackson, Chief Executive Officer of the Company, hereby certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to thebest of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financialcondition and results of operations of the Company.

/s/ Michael J. Jackson

Michael J. JacksonChairman and Chief Executive Officer

March 2, 2006

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of AutoNation, Inc. (the ""Company'') for the yearended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof(the ""Report''), I, Craig T. Monaghan, Executive Vice President and Chief Financial Officer of theCompany, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financialcondition and results of operations of the Company.

/s/ Craig T. Monaghan

Craig T. MonaghanExecutive Vice President and ChiefFinancial Officer

March 2, 2006

HighlightsFINANCIAL

BUSINESS DescriptionAutoNation, Inc. (NYSE: AN) is America’s largest automotive retailer. As of April 24, 2006, we owned

and operated 345 new vehicle franchises from 268 locations in major U.S. marketsacross 17 states, predominantly in the Sunbelt region. Our stores, which we believeinclude some of the most recognizable and well-known in our key markets, sell 37 different brands of new vehicles. The core brands of vehicles that we sell, representingapproximately 96 percent of the new vehicles that we sold in 2005, are manufacturedby Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW. We offer a diversified range of automotive products and services, including new vehicles, usedvehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources.

RECENT DevelopmentOn April 12, 2006, AutoNation successfully completed a tender offer for 50 millionshares of our common stock, at a price per share of $23, together with related debt financing transactions. The transactions allowed us to deliver $1.15 billion of cash to stockholders while retaining financial flexibility to take advantage of futureopportunities. In addition, we expect the transactions to be accretive to future earnings in the estimated range of $0.13 to $0.15 per share on a full-year basis.

The $1.15 billion stock tender offer, together with a concurrent debt tender offer and consent solicitation for our 9% senior notes due 2008, was funded with the proceeds of the debt financing transactions described below together with approximately $310 million of cash on hand and revolving credit facility borrowings.Pursuant to the debt tender offer, we purchased all of the approximately $309.4 million, or 95.6%, of the Company’s outstanding 9% senior notes that were tendered.

The debt transactions included the sale of $300 million of 7% senior notes due 2014,the sale of $300 million of floating rate senior notes due 2013 at an interest rateequal to LIBOR plus 2% per year, adjusted quarterly, an amendment to our revolvingcredit agreement and a $600 million term loan maturing 2010.

As a result of the stock tender offer and related transactions, we reduced the number of our outstanding shares of common stock by 50 million, or approximately19%, and our long-term debt increased to approximately $1.5 billion.

CONSOLIDATED BALANCE SHEET HIGHLIGHTS

$20

15

10

in Billions

2004 2005

T

$18.3

$19.0i

2003 2

$19.3

$

$397

$519*

$600

500

400

300

200

100

0

in Millions

N

2004 20052003

$396

$

2004 2005

$

20032

$1.80

1.60

1.40

1.20

1.00

.80

.60

.40

.20

0

$1.48

$1.81*

$1.46

$

$1.34 $1.36

2004 2005

A

2003

$1.80

1.60

1.40

1.20

1.00

.80

.60

.40

.20

0

$1.45 A S O F D E C E M B E R 3 1 ,

(in millions) 2003 2004 2005

Total Assets . . . . . . . . . . . . . . . . . . $ 8,823 $ 8,699 $ 8,825

Long-term Debt. . . . . . . . . . . . . . . $ 809 $ 798 $ 484

Shareholders’ Equity . . . . . . . . . . $ 3,950 $ 4,263 $ 4,670

Shares Outstanding . . . . . . . . . . . 270 264 262

*2003 results include a $127.5 million ($0.44 per share) income tax benefit from an IRS tax settlement.

**Adjusted diluted earnings per share from continuing operations excludes certain items. See the inside back coverfor a reconciliation to diluted earnings per share from continuing operations (the most comparable GAAP measure).

Total Revenue from Continuing Operations

Adjusted Diluted EarningsPer Share fromContinuing Operations**

Net Income fromContinuing Operations

Diluted Earnings Per Sharefrom Continuing Operations

InformationCORPORATE

HeadquartersAutoNation, Inc.110 S.E. 6th StreetFort Lauderdale, Florida 33301Telephone: (954) 769-6000www.AutoNation.com

Investor Contact and Information RequestsShareholders, securities analysts, portfolio managers and representatives of financial institutions requesting copies of the Annual Report, Form 10-K, quarterly reports and other corporate literature should call (954) 769-7339 or write AutoNation, Inc., Investor Relations, at the above address.

Notice of Annual MeetingThe Annual Meeting of Shareholders of AutoNation, Inc. will be held at 9:00 a.m., Thursday, June 1, 2006 at:

AutoNation Tower110 S.E. 6th StreetFort Lauderdale, FL 33301Telephone: (954) 769-6000

Common Stock InformationThe Company’s common stock trades on the New York Stock Exchange (NYSE) under the symbol “AN.”

At April 24, 2006, there were 2,650 shareholders of record.

Common Stock Transfer Agent and Registrar For inquiries regarding address changes, stock transfers, lost shares or other account matters, please contact:

Computershare Investor Services, LLC2 North LaSalle StreetChicago, IL 60602

Registered owners of AutoNation common stock may also call (800) 689-5259, Mondaythrough Friday (9:00 a.m. – 5:00 p.m., CST), to inquire about address changes, stock transfers, lost shares and other account matters.

Internet users can access information at http://www.computershare.com.

Regulatory CertificationsThe Company filed the CEO and CFO Certifications with the U.S. Securities and ExchangeCommission as required under Section 302 of the Sarbanes-Oxley Act as exhibits to itsAnnual Report on Form 10-K for the year ended December 31, 2005. On June 9, 2005, theCompany submitted the annual CEO Certification to the New York Stock Exchange (NYSE)as required under applicable rules of the NYSE.

Independent Registered Public Accounting FirmKPMG LLP, Fort Lauderdale, FL

Forward-looking StatementsSome of the statements and information contained throughout this Annual Report constitute“forward-looking statements” within the meaning of the Federal Private Securities LitigationReform Act of 1995. The forward-looking statements describe our expectations, plans andintentions about our business, financial condition, results of operations, cash flows andprospects. Known and unknown risks, uncertainties and other factors (including thosedescribed in our Form 10-K) may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed orimplied by the forward-looking statements. We undertake no duty to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.

RECONCILIATION OF GAAP REPORTED EPS FROM CONTINUING OPERATIONSTO ADJUSTED EPS FROM CONTINUING OPERATIONS

D i l u t e d E a r n i n g s p e r S h a r e

(in millions) 2003 2004 2005

EPS from continuing operations, as reported.................................................. $ 1.81 $ 1.46 $ 1.48Income tax adjustments ......................................................................................... (0.04) (0.09) (0.06)Senior note repurchases......................................................................................... - – 0.04Income tax benefit from IRS settlement – Q1 2003 ........................................ (0.44) – –Gain on sale of non-core equity investment – Q4 2003................................ (0.02) – –Impairment loss on converted megastores – Q4 2003 ................................. 0.04 – –Adjusted EPS from continuing operations ........................................................ $ 1.34 $ 1.36 $ 1.45

Note: Columns may not add due to rounding.

Edward S. Lampert 2

Chairman & Chief Executive Officer ESL Investments, Inc. (an investment firm)

Mike JacksonChairman &Chief Executive OfficerAutoNation, Inc.

Robert J. Brown 1, 2, 3, 4,5

Chairman & Chief Executive OfficerB&C Associates, Inc.(a management consulting and public relations firm)

J. P. Bryan 1

Chairman & Chief Executive OfficerTorch Energy Advisors, Inc. (an outsourcing and service provider to the oil and gas industry)

Rick L. Burdick 4

PartnerAkin, Gump, Strauss, Hauer & Feld, L.L.P.(a law firm)

Michael E. Maroone President &Chief Operating OfficerAutoNation, Inc.

Irene B. Rosenfeld 1, 2, 3

Chairman & Chief Executive OfficerFrito-Lay, Inc. (a snack and convenient food company)

William C. Crowley 4, 5

President & Chief Operating Officer ESL Investments, Inc. (an investment firm)

Board Committees1 Audit Committee 2 Compensation Committee 3 Executive Compensation

Subcommittee

4 Corporate GovernanceCommittee

5 Nominating Subcommittee

DirectorsBOARD OF

J.P. Bryan has announced that he will retire from our Board of Directors on the date of our Annual Meeting of Shareholders. J.P. has served on our Board since 1991, providingvaluable insight and guidance.

J.P.’s 15 years of service were noteworthy for theextraordinary diligence he exhibited as a directorand his unwavering commitment to building a greatcompany. J.P. took the lead as a director on manysignificant transactions and initiatives for us overthe years, and he never hesitated to challenge hisfellow directors and AutoNation management todrive towards the right decisions in furtherance of our goal of building a great company.

Please join me in thanking J.P. for his service and wishing him well in retirement and all of hisfuture endeavors.

— Mike Jackson, Chairman of the Board and CEO

TRIBUTE TO J.P. Bryan

AutoNation, Inc.110 S.E. 6th Street

Fort Lauderdale, FL 33301954-769-6000

www.autonation.com

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EXECUTION & EXCELLENCEDRIVE RESULTS

AutoNation, Inc. 2005 Annual Report

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